Cool but tricky gift annuity ideas

Welcome new subscribers to the Planned Giving Blog – thank  you for joining our 800 subscribers!  This week though I came across some interesting gift annuity issues that I think are important to think about.

Flexible deferred gift annuities are totally OK if you are licensed in NY (to issues CGAs)

That is the good news but there are some serious caveats.  If you were wondering, the flexible CGA is a deferred CGA in which the donor can choose when payments are to start (with at least a one year deferral to start). Each year the donor delays, his/her potential payment jumps to reflect an additional deferral year.  A really cool option for many reasons, besides the fact that it is a great way for a donor to “wait and see” as their right to income increases dramatically each year they don’t activate the CGA.  I have pitched these where the donor is not sure he/she will even need the income or they want some sort of hedge to see if the nonprofit does what it says it will do.  In other words, the donors may choose never to take the payments! Also, the contract itself lays out what the new payment plan would be each year, avoiding potential conflicts with your donors in the future.

Here is what makes them tricky if you are licensed in NY.  The NY guide on CGAs from their Dept. of Insurance states that Flexible Deferred are ok if the contract is for up to 20 years of payment options.   Beyond a 20 year schedule, you need approval from them for your contract.  What a headache and who knows how long they will take and how much nit-picking they will do over the language of your contracts.  NY Dept. of Insurance attorneys are known for ridiculous scrutiny over every punctuation mark and even reject previously approved language.  To make matters worse, NY expects you to only use pre-approved agreements, in general.  Have you gotten your Flexible Deferred CGA agreements approved?  Have you gotten the language of your other contracts approved!

One client of mine ran into some trouble with the NY Dept. of Insurance, apparently ignored their demand letters, and received a cease and desist letter from issuing new CGAs until they dealt with whatever the issue was.  This issue of contract language had become a big problem for them and they had to return a really large amount of money to a recent annuitant to undo their CGA since it happened during the suspension period.  Yikes.  You can guess that a consultant (me) was needed in the absence of the fired planned giving director (lesson for anyone in charge of planned giving programs – don’t ignore those legal letters!).

All of this reminds me how annoyingly complex running national CGA program can be.  Basically, your program better bring in enough CGAs to justify significant staff time overseeing the program’s legal/registration issues or maybe it’s time to think twice about issuing CGAs in every state (particularly NY and CA).

CGA funded with an Estate Note?

This idea come up yesterday with a client.  What is the difference between an irrevocable estate note (irrevocable pledge) and a life estate?  Life estates offers donors a charitable deduction and a charity in theory can accept a life estate for a CGA.  A legally binding pledge/note against your estate doesn’t offer a deduction but who is to say it isn’t any riskier than a life estate in real estate.  Why not allow a donor to sign a legally binding commitment to an amount out of his/her estate and the charity gives him/her a gift annuity for the present value of the committed amount.

Now, you have ask the obvious – why in the world would the nonprofit commit to paying a lifetime annuity when all they have is a pledge agreement?  Yes, there has to be assets at the nonprofit (whether given by this donor or not) which they can park in their CGA pool to replace the present value figure to rely on to cover the payments.  Assume that is the case.  Any other issues with this plan? Am I treading in S. Prestley Bake territory (for the legal nerds out there) – the namesake for my law school (which happens to be considering a change to The Lois Lerner Law Center 🙂

Stay tuned as I work on this one…..


Planned Giving Criminals?

Oh, yes, there are a few.

For now, this story seems to have flown under the radar – not picked up yet by the Wall Street Journal or the NY Times.  Probably a matter of days because it seems to fit a popular line of journalism in this area of focusing on the bad apples.

In brief, Richard K. Olive and Susan L. Olive allegedly went around selling charitable gift annuities and other means of giving on behalf of a phony charity, to line their own pockets, etc…  The amounts stolen are at a minimum $30 million (Mr. Olive was just convicted on that amount on federal charges) and upwards of $70 million or more (alleged in an SEC press release on different charges).

Here is a link to the SEC’s press release on the story if you are interested in the details:

And, here is a link to an article about how the scoundrel named in the above indictment was just convicted in Tennessee federal court on similar abuses of charitable gift annuities:

Always sad when this stuff hits the news – definitely sends the wrong message about an industry that is generally very honest and almost always helping individuals do good with their money (while helping themselves, too).

Year-End Giving Quandaries

The year is winding down and with two weeks left, if you are a planned giving officer or fundraiser that deals with out of the box gifts, it is time to remind ourselves of some of the interesting challenges we might experience.

Here is a potpourri of new and old ideas/rules to consider:

  1. Mail box rule – interesting rule since it means that the date of gift is the day the donor puts the check in the mailbox, not necessarily the date stamped by the post office on the envelope.  My approach – for checks received in early January that are dated with a December date on the check – I would give the donors the benefit of doubt, regardless of the postmark.  By the second or third week of January, I might not be as easy going.
  2. Credit card gifts – I just heard an attorney mention that technically, a credit card gift is not completed for charitable income tax purposes until the date of the donor’s next statement.  Yikes – that means that year end credit card giving is problematic?  My advice is to ignore you read this paragraph.  We are usually talking about small gifts?  (ok – remember my rule – bigger the gift, bigger the precautions – so think twice on this one for gifts in the thousands and above).
  3. Last second of the year gift annuities – I just heard the smartest, toughest attorney in the Planned Giving world actually say that he could see the last second – “hey stock is on the way for a new CGA just before new year’s eve” (even WITHOUT a written contract yet) – actually work.  His reason – if the donor had done CGAs previously, a donor’s verbal announcement and transfer, coupled with the donor’s knowledge of these gifts, sounded like a “meeting of the minds.”  My advice: I would take whatever steps possible to make the donor happy and give them their 2011 CGA.  If a stock transfer is initiated in 2011, I would probably figure it out to make it a 2011 gift.  We are not talking about serious crimes here.  Just my approach.
  4. Last second CRTs – To me, there is a limit to what can be done quickly and unless the donor’s attorney is making this happen, I would recommend not guaranteeing anything to your donor.
  5. Last second Real Estate gifts – Ok, these are really hard.  What about two weeks notice?  Get the donor’s attorney involved.  I just heard that the IRS is generally fine with Single Member LLCs, charity being the single member, receiving a risky gift and limiting liability (until  you can figure out what to do with it).  LCCs are easy and quick to set up.  I would only recommend this last second approach on a clear good deal, from a clearly good/friendly donor – who has counsel taking care of it.
  6. Last second Lead Trusts – not possible.
  7. Last second direct IRA gifts – this is a tough one.  If the transfer doesn’t happen until early January, your donor might be facing income tax on the gift (with an offsetting charitable deduction as long as you give him a proper gift acknowledgement).  That result isn’t so horrible but your donor better be informed of the possibility.  Try to find out from the IRA custodian how the transfer will appear in the account of the donor.  If it can show up as a 2011 transfer, even if charity gets it in 2012, I wouldn’t be so concerned.

Please comment and ask your end of year questions!

Remembering the Spring of 2009 – Let’s not forget the risks involved in Planned Giving

I know I promised a NY Times/WSJ style article to my blogosphere readership – that will take a few days.  In the meantime, I came across an interesting presentation that is worth sharing.

While looking at my cluttered computer desktop last night, I opened a presentation that I gave to the Philanthropic Planning Group of Greater New York in May of 2009 with a colleague and some reinsurance people from The Hartford.  A really interesting presentation and still relevant today.

Here is it: Planned Giving Day presentation on crashing stock market and CGAs

This was done at the height of the crashing stock market, CGA programs were buckling under unheard of market losses, and we really had to wonder if the field of planned giving would ever be the same.

Anyway, why should all of the work we put into this presentation disappear into the annals of computer memory.  Check it out and post questions on it here!

And, believe it or not, under the right circumstances, I believe that reinsurance of CGAs (and possibly CRTs) actually works better than “self-insuring” (keeping and investing) for most CGAs/planned giving programs.  Just don’t ignore my “under the right circumstances” caveat.