Quick Planned Giving lesson on Commercial Annuities

Quick Planned Giving lesson on Commercial Annuities

It would be impossible to explain commercial annuities in a blog post, let alone a book. As far as I can tell, they refer to a wide-range of insurance-like “products” where quite often unsuspecting individuals place bets hoping that they can outplay the house (i.e. live longer than expected). Any casino or insurance company (if you think about it they are really very similar), regardless of all of the smiles and welcome goodies, are out to win. And they have teams of actuaries making sure that the odds are in their favor.

So why do fundraisers need to know anything about these things except to just stay away from them?

Here is synopsis of a client/donor call I had last week. Donor has an “annuity” and wants to give it to a charity. Great news. What’s the question?

Firstly, what kind of “annuity” are we talking about?  Ok, it’s some sort of commercial annuity, I actually don’t need to know anything else.

Well, donors can NOT transfer commercial annuities directly to charities like appreciated stock or real estate. I have looked into this one enough times – it doesn’t work. The reason donors might prefer this is because the actual alternatives are not as exciting. For donors with charitable inspirations for commercial annuities, the donor can either (1) surrender/cash in the annuity (along with potential surrender charges and taxes on investment growth – I told you insurance companies stack the deck in their favor – they rarely lose) or (2) designate the charity as remainder beneficiary to receive funds left in the annuity on your passing.

So what is up the “surrender charge”? That is a fee – particularly in the first 7 or so years of owning an annuity – to scare people from cashing in the annuity. It could be upwards of 20% of the fund.  It usually goes down every year you own your annuity until it disappears.  It is the insurance company’s way of ensuring they make a minimum amount on you.

There could also be a 10% penalty for any “pre-tax” funds withdrawn by anyone 59.5 and younger.

And, any growth over your initial investment would have to be taxed upon your cashing in of the annuity.

For these reasons, my experience has been that it is usually not worth the headache of fees and penalties and taxes for donors to go ahead and cash them in.

The second alternative though is much less painful.  In fact, it is very similar to a beneficiary designation of an IRA or other retirement account and is a good, clean “planned gift.”

Our donor opted actually for cashing in his annuity – it was owned well over the 7-year penalty period, he was over 59.5, and his plans were to fund a project today with the entire proceeds so any taxable income would be offset with the subsequent charitable contribution.  The only issue he and his accountant needed guidance on were the deductibility limits.  The accountant for some reason assumed that it fell under the 30% of AGI ceiling, thinking that the donor would somehow directly transfer the annuity like an appreciated asset.  I informed them that it would fall under the 50% AGI ceiling since it was just a cash gift and all were happy.

The point of this blog post, in addition to nothing exciting to write about this month, is that these little details about different financial products can be important to your donors.  And, their accountants and other advisors may not know what to do when it comes to a charitable gift with various financial products.  This donor had consulted his accountant and his annuity company and neither gave him any clarity as to how to make his charitable intent happen.  Our job – as planned giving professionals and fundraisers – is to fill in the gaps, guide in the right direction and help philanthropic plans come to fruition despite the lack of knowledge out there.  I would have felt good if my guidance led him to decide to only put the charity in as a beneficiary.  But, of course, it feels much better when an actual gift happens!

4 comments

  1. Wow, it has been some time since I read something as slanted and one sided as this missive. I believe you should have quit when you said, “It would be impossible to explain commercial annuities in a blog post,….” but then you attempted to do so.
    Are there commercial annuities out there which are not in the investors best interest? Of course. Are all of them as nefarious as what you would lead people to believe with this? Of course not. This post is a disservice to those who are not familiar with the commercial annuity market, and would take the information that you provide as accurate.
    It is also a far cry from the quality I have come to expect from your posts.

    For Shame!

    1. Are you in the insurance business? If you read enough of my pieces, you will see that I try to be fair to the various financial products out there but it’s a blog and you are getting my opinion. I have seen too many problems with these things not to be jaded. Anyway, the point of the discussion is how do address a scenario where a donor already has a commercial annuity and is thinking about doing something charitable with it. I am sure there are great annuities offerings out there and great annuity sellers out there. I just haven’t run into any that make sense to me.

      1. The annuity industry has evolved immensely over the past 20 years, especially the past 10 years. There are annuities in the marketplace which are sold without a surrender change (CDSC), however the ongoing fees (Mortality & Expense) are higher than those with a CDSC, to make up the difference over time. Bottom line is, there’s no ‘one size fits all’ annuity out there. Hopefully, the donor has a competent financial planner to navigate the marketplace during both the accumulation phase and the gifting phase of the donor’s life.

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