All’s Not Well, That Doesn’t End So Well (Either)

This would be a frustration post (but with some interesting gift planning tossed in).

Quick facts:  I gave an estate planning seminar to a group of prospects/donors for a client.  Someone in the audience came up after the speech with a bunch of detailed questions about CRTs.  It became quickly clear that this person had set up his own CRAT, had gotten some really bad advice on the principal investment, and the trust was definitely heading towards insolvency in the not so distant future (10 years max at my guess).

I offered my compassion, especially since his charitable goals were going down the tubes, along with the not-so guaranteed income.

This initial meeting spurred talks with his financial adviser through the charity I had been speaking for.  Basically, the donor had three options: 1. keep his income and let the CRT run out of money; 2. give up his income and let the charity get something; or 3. exchange his right to the CRAT income for a CGA income (based on the net proceeds transferred to the charity).

I made sure several times that the donor heard option #2 clearly – not to jump to # 3 so quickly.  That said, we started discussions on option #3.  Without revealing any significant details, basically a new CGA for this donor would give him 50% of the CRAT income (but this time guaranteed for life), a new massive deduction (because the AFR is really low – will try to explain in another post), and the satisfaction that there would be a nice gift to the charity at the end.

Any glitches?

Firstly, can this be done?  Yes.  Luckily for us in the gift planning world, there is a private letter ruling describing the whole deal (double click on this link:  Letter ruling on converting a CRT to a CGA).  The one glitch I saw from the letter ruling was the requirement to use a zero basis for the new CGA – which basically turns the entire “tax-free” portion into a capital gains portion for the donor’s life expectancy.  But, the new deduction (which PGCalc does a qualified appraisal for about $300) was plenty to offset that negative aspect of the deal.

What went wrong?  This was a perfect deal.  A solution for a problem that results in a new gift, happy donor, etc…

The advisers!  Actually, the same people who gave the bad advice on the CRT investment.  I went over the letter ruling with their tax experts but I sensed that charitable structures, especially a more sophisticated one like we were contemplating, were completely foreign to them.

And, sure enough, after the donor met with the so-called tax experts, today’s message was the donor was too nervous to rely on a private letter ruling.  I wonder where he got that message.

Read that letter ruling, it is actually pretty straight forward (except for the zero basis thing).  The letter ruling tells you how to do this.  This is about the only decent solution for a collapsing CRT that salvages something for the donors and the charities.

It’s not over – as this donor has to think about this CRT every time he sees the investment statement .  If he decides to donate his CRAT payments to charity – I could see that as somewhat of a solution.

My frustration is that the same bumblers who helped cause the problem, are the same ones most likely preventing the best solution from taking place.  I know, and warned everyone involved, that this donor needs to be completely informed and on board with the deal and needs to have independent legal advice.  But still, something gnaws at me that these “advisers” are a bit clueless.

Planned Giving Lesson of the Week – To Start (or Keep) a CGA Program or Not?

I struggle often about gift annuities (“CGA”) – are they all they are cracked up to be (for nonprofits)?

Even before the market crash last year, various state regulatory struggles have made it more and more difficult to operate widespread, multi-state or national gift annuity programs.

Throw in market volatility and other investment uncertainty, and if you start to understand how pension investment/risk management should be handled, you really have to wonder whether it is worthwhile for charities to start new CGA programs or for smaller ones to continue stagnant ones?

This is coming from a guy who is paid to setup/run/oversee CGA programs and has done the licensing in New York, New Jersey, California, Florida, and lots of other places for multiple jobs and clients.

At the past planned giving group meeting in NYC this week, I was the moderator for a panel on CGAs with 2 panelists being from large established CGA programs and one being from a large investment/administration provider.

The panelists were terrific, exposed the audience to some of the higher levels of planned giving experiences out there. But, my question did not get directly addressed.

The answer to my ongoing question of whether CGA programs are worth it or not for many charities actually started to come to me during the networking, drinking stale diet coke session before the luncheon.

It was a conversation with an old friend, who is at a charity which myself and my firm had lost out to on a bid to provide planned giving consulting. Two years after we lost the bid, and they were already bringing in $1 million plus in CGAs a year. What were they doing? Two direct mail letters a year to an approx. 100,000 database of potential planned giving prospects (this is a well established national emergency aid charity that had just never gone heavily into planned giving but was already receiving a significant percentage of bequest revenue).

Then the panel started. The biggest institution represented was mailing 1.8 million CGA “solicitation” pieces a year. The other institution was marketing CGAs consistently to 137,000 members – no age overlay but likely that most were age appropriate.

I hope you are getting the message. Building a successful CGA program is numbers game. In the scheme of things, as great as your PGCalc/Crescendo illustrations look, most potential planned giving prospects will overwhelmingly not commit to irrevocable gift arrangements – people just don’t part easily with their money.

But, if you have the numbers, I mean really large numbers of prospects and you commit to marketing intelligently to those prospects, you will close gifts and more than justify this “pain in the ass” CGA program.

Is there a magic number? No. And, of course it costs plenty of money to market to a 100,000 plus database. You better think about whether this database of prospects are really prospects.

And, what if you are raising a lot of money from a small amount of donors? Let’s say a few thousand (like I hear in conversations all the time). Is a CGA program for your institution? Probably not, or at least not until you build large numbers of annual/direct mail donors into your database.

To be continued. Have a great weekend.

Planned Giving Articles – Et tu, New York Times?

I better start reading the New York Times because I am almost missed this one by about two months.

The link is below but here is my introduction:

It’s about the National Heritage Foundation (NHF) bankruptcy situation. The article starts out bemoaning the fact that NHF had to take $25 million of its Donor Advised Fund (DAF) money to settle with its 107 gift annuitants. Then the article moves into a loose discussion about gift annuities. Check it out if it interests you but please see my after-article comments below

I was asked by a friend today about a line in this article that made a board member nervous.

I am going to try and keep my comments ask kind as possible. The article’s beginning leaves out one crucial legal fact: DAF money is considered from a legal point of view to be TOTALLY and COMPLETELY UNRESTRICTED. That’s the deal – sorry DAF donors. If the charity runs into financial trouble (like NHF did), DAF money is TOTALLY AND COMPLETELY AVAILABLE. Period. If the DAF donor doesn’t like it, then start a private foundation.

That is why the legal cases of most of NHF’s DAF donors were thrown out of court. It doesn’t excuse any fraud committed by NHF in obtaining those donations.

Secondly, my problem with this article is that it seems to be pitting DAFs as the good guy and CGAs (gift annuities) as the bad guy. Or maybe not. I actually know the author, and I think she is a great writer, but something tells me that the editors messed this one up. I really couldn’t respond to the question I received this morning because I had no idea where the article was going.

Third point – this is a quote from the article:

Faced with shrunken endowments, charities are seeking to bolster giving by heavily marketing gift annuities, emphasizing the income stream they offer.

The article offers no proof of this statement and if you asked me, I would say the opposite. I think charities have slowed their CGA marketing out of fear of the liabilities they are dealing with. Getting new annuities is actually a good idea for a basically healthy program but it has nothing to do with NHF or the initial part of the story.

There was an interesting story there – it just never came out. It is interesting to note that DAF money was used to pay off CGA donors of a charity going into bankruptcy. What was also interesting was the fact the CGA donor mentioned actually received back $131,239 from his initial CGA gifts of $235,000.

Considering what Madoff investors, as well as other ponzi scheme investors, will receive, I think the NHF CGA donors did pretty well. I am guessing that this donor got to keep his initial charitable deductions. He was barely out of pocket if you think about it. The story should have been how CGA donors had a right to receive something in the bankruptcy – and obviously were in a decent place in the line.

Something about the whole article bothers me – is it only me? Isn’t there lack of focus? No wonder a board member is pulling a quote from the piece to cause some trouble. It took me a few minutes to figure out what it was talking about.

Planned Giving Challenges – Source for CGAs in the IRS Code

One of the most annoying challenges you may face as a planned giving professional is an attorney or an accountant of a donor who is requesting the source in the IRS code for charitable gift annuities.

What makes this such a difficult question (besides the fact that an entire industry uses these things – they work and are accepted!!) is that CGAs were not a one time creation under the IRS Code like charitable remainder trusts. So, we can not point to one CGA section in the Code.

Anyway, I got this question this week and I wanted to go through the roof. At first, I scanned and emailed the entire chapter on CGAs from Tax Economics of Charitable Giving (lots of sources to look up quoted by them). But, I also called a top planned giving attorney to see if he had the info handy. Sure enough, the question was common enough that he went right through the 4 primary sources in the IRS Code and Regulations for CGAs. Here they are:

Section 642(C)(5) – the definition and basic rules for CGAs

Section 501 (M) – Exempts CGAs from being treated as commercial insurance products (as long as the charitable deduction is greater than 10% of the gross gift amount)

Section 72 – This section really deals with commercial annuities but is also the source for how the “tax-free” portion of CGA payments are determined. (note: even though 501(M) says CGAs are not commercial annuities, the code has no problem using section 71 on commercial annuities to help define income issues with CGAs even though they are not supposed to be commercial annuities!)

Regulation 1.1011-2(b), example 8 – This example in the regulations has been an important source for 40 years or more for how CGAs work and how the code treats them as Bargain Sales and this in turn helps us determine the charitable deduction.

I would bookmark this page or print it. Someday you’ll need it.