commercial annuities

When Financial Advisors Get Creative….

Quick Planned Giving lesson on Commercial Annuities

I couldn’t resist using this cartoon again but this time (to see previous post on commercial annuities – click here), I have a crazy scenario that just played out with a professional advisor who tried to foist a commercial annuity into a CGA on behalf of an unsuspecting intended charity.  See that previous post for more about commercial annuities – this post will just cover one of many disastrous scenarios that could occur.

Here are the facts as presented to me (with small changes to protect the innocent).  A friend (a planned giving director) calls last week with a nervous message, something about a donor giving them a commercial annuity (which I know doesn’t work).   What I find out when I get through to him is that the donor funded a commercial annuity that was somehow placed in the name of the charity but would pay lifetime annuity payments to the donor.  Really strange and my initial reaction was to direct him immediately to competent legal counsel.

After mulling this story over, and hearing a few more details, this is a must read post for planned giving professionals.

What happened here?  The planned giving director had given the professional advisor a CGA illustration on the donor.  Instead of finding out how CGAs work, the advisor decided to ask a really big insurance company (presumably one he is affiliated with) to somehow make the scenario work.  I am guessing that meant to get the donor his lifetime annuity payments and the advisor his commission!  Oh yeah, maybe a second thought about the charity’s remainder – NOT.

What did this multi-trillion dollar insurance company (one that took hefty bailout money just a few years ago for being too big to fail) come up with?  Their solution was to have the donor purchase on behalf of the charity a $100,000 commercial annuity that would pay the donor his CGA rate for his life.  All’s well that ends well, right?  Donor gets annuity and a $100,000 deduction (according to the advisor, at least), advisor gets his commission, charity gets remaining funds in the commercial annuity when donor passes (advisor even told the planned giving director that the remainder was a $100,000 guarantee to the charity – we’ll see about that!)

Your mind should be churning a bit here.  Let’s go through each problem.

  1. Income tax deduction – The donor basically transferred to the charity $100,000 and immediately invested it (on behalf of the charity) into this commercial annuity.  Lot’s of problems here.  #1 donor control of investment is a no-no, meaning no deduction, zero, zilch.  Let’s say the charity had acquiesced retroactively.  Basically, the donor created his own CGA – at best the donor might be entitled to the appropriate CGA deduction.  Advisor’s claim that donor should get $100,000 deduction showed how completely ignorant he is on these matters.
  2. Commission – Let’s say charity said fine, we have a CGA here and the charity agrees that this investment is fine (which it probably is NOT for the NY State Dept. of Insurance – who would probably have forced this entire thing to be reversed if it ever got to their attention).  A big problem is that the advisor basically took a commission on the issuance of a CGA – a violation of the Philanthropy Protection Act (the Act that exempted CGAs, among other vehicles, from SEC regulation).
  3. Remainder – The advisor’s guarantee that the charity was guaranteed a full $100,000 was a complete untruth.  In fact, when the planned giving director inquired of the insurance company about what happens to the remainder, they told him that it basically extinguishes around the end of the life expectancy of the donor.  Nothing, zilch, for charity if donor lives to life expectancy.  Talk about chutzpah!
  4. NY Dept. of Insurance (NY-DOI) – Hate’em, yes, if you have to deal with them but in this case, there is no way they would have let this go (which is a good thing).  I know one scenario where an advisor had a CGA program reinsure all of its CGAs (a NY charity) and didn’t follow NY’s rules (which are particularly strict on reinsurance).  They forced that nonprofit to undo all of the transactions.  Not fun. This one would have been killed sooner or later (probably at the expense of the pg director’s job).

Let’s add it all up. Extremely doubtful deduction, illegal commission, horrific investment choice, NY-DOI will make you pay dearly.  I have probably even missed a few problems.

Why do such disasters happen?  Ironically, the worst planned giving disasters (besides the Huguette Clark estate) almost always involve attempts to  use commercial annuities in planned giving contexts.  Besides the reinsurance disaster mentioned above (that was about purchasing commercial annuities to cover CGA payments), I’ve dealt with disastrous use of commercial annuities as investments in CRTs several times and I just keep asking myself WHY?  Why in the world do advisors do such stupid things like this?

The answer, which my planned giving director friend also agreed with, was the drive to get a commission.  Yes, it comes down to dollars and cents.  Advisors need commissions – preferably cash upfront.  That is their lifeblood, their inspiration.  And, even though commercial annuities don’t pay the great commissions that life insurance policies do (which are insanely huge), they are probably enough for the advisor to sleep well at night.  Of course, if your prime focus is how you can benefit from this gift (you meaning the advisor), you might not pay too much attention to small details like any remainder for the charity.

I had an advisor once defend a case where donor/client put up $25,000 in insurance premiums for the first five years of a policy and by the 6th or 7th year, the policy was already lapsing for nonpayment.  The donor had wanted to give $25,000 to get a $100,000 policy (and leveraged naming gift).  But, the policy needed another 20 years of premiums or more.  Charities almost never pay premiums, certainly not mine at that time.  The advisor skipped that issue when setting up the policy – what should he care?  He got his commissions from the first payments.  I confronted him (and even had pro-boon counsel ready to make his life miserable) and he didn’t show the slightest feelings of guilt. It dawned on me then that singular focus by advisors on their commissions is a dangerous thing.

Back to our story.  Luckily for all involved, there is a 30 day “get out of jail free card” when buying commercial annuities.  The whole thing is being undone.  Somehow the donor isn’t angry, advisor came up with some excuse, and the charity will issue a CGA after all.

Ironically, if this advisor had any clue, he could have advised the donor to set up a CRT and continued to manage the money and continued to get some commissions.  Of course, he probably did better with the immediate commission from the commercial annuity in the short term.  Now, he get’s nothing, which should make us all feel a  little better about this story.

And, sadly, this story confirms how insurance companies are utterly ignorant of this stuff.  How could a room full of guys (who all drive BMGs and Porches) be so stupid? I would love to train advisors but they will have to learn to change their outlook to get a clue on planned giving.  It can’t be about your silly $2 commission.  It has to be about finding the best options for your clients!  And, they might have to actually use their brains a bit.

Anyway, the bottom line with commercial annuities in a planned giving context is this: They never work (except for simple beneficiary designations) and are actually very dangerous from a tax standpoint (to the donor and the charity).  In other words, stay away from them if an advisor is trying to slip one into a planned giving situation.

Commercially Structured Planned Gifts

There are certain taboos in the fundraising and planned giving worlds.  One of the biggest taboos is providing a financial salesman access to your donors – regardless of the “awesome” deals they are selling.

And, this taboo is for good reason – if you give the access, you (the fundraiser) take responsibility for anything that comes out of the introductions, including any embarrassment that the whole ordeal might involve.

But, the nonprofit world also tends to be overly protective and over reactive at times – even in the face of potential good plans for their donors (which by the way help your charity, too).

Here is a new term the planned giving world should add to their list of gift options:  Commercially Structured Planned Gifts.  Commercial because they usually involve the use of a commercial annuity and certainly involve the use of financial planning vehicles outside of the traditional planned giving world.  Without dwelling on any details – we’ll save that for another post – there are definitely circumstances where the use of a commercial annuity, possibly in conjunction with a life insurance policy, can produce a much better deal for the donor and the charity.

What I am talking about is a situation where you have a donor interested in some sort of planned gift option, most likely a gift annuity or other life income plan.

What if the charity really needs some cash upfront, rather than seeing the entire principal locked away in a CGA pool or CRT account for 20 or more years?

What if the charity is not licensed or equipped to manage a lifetime income obligation like a CGA or CRT?

What if the charity is concerned about the risk of over concentration in a gift annuity pool on a large single donor?

What if the donor needs more assets returning to their estate for their heirs?

In any of these situations, if you have a donor ready to put up CASH (as opposed to appreciated assets) in exchange for some sort of life income or term of years income guarantee, it is my hunch that a financial planner who knows how to “arbitrage” with commercial annuities and life insurance can come up with many winning scenarios.

I know we planned giving  folks loathe bringing the commercial side of financial planning into our world – too many fly-by-night, get rich quick, schemes have come and gone.  And, for the unlucky few charities that fall into them, there is usually huge regret.   But, if we – the planned giving fundraisers – are dedicated to finding the best solution for our donors and institutions, I am telling you right here that carefully designed commercial products can possibly produce the best option for everyone.

Here is one example just run by me recently:

A 77 year old male (good health) could get a 6.2% CGA.  For a $100,000 CGA, that would be a $6,200 per year annuity and a $44,000 income tax deduction.  The cost to produce the same lifetime income (with similar tax free portion benefits) with a commercial annuity is approximately $61,200.  If the donor contributes the remainder (that would have been part of the CGA contribution), that would be a gift of $38,800.   Yes, the donor would be receiving around $5,200 less income tax deduction but the charity would be receiving $38,800 for immediate use – no need for reserves, departments of insurance, or risk.

This is just one example based on real numbers.  And, there are a lot possibilities.

It’s just time for us to be more open to these possibilities and to get more familiar with non-charitable vehicles.

New Planned Giving Option (at least for me)

A few weeks ago, an old friend emailed me a chart comparing a charitable gift annuity versus the donor buying a single premium immediate annuity (i.e. commercial annuity) and donating the savings to your organization.

The chart was startling. It compared a $1 million CGA for a 74 year old, 6.1% ACGA rate, against the same donor buying an immediate lifetime annuity to obtain the same $61,000 annuity. It said that the donor could buy the $61,000 annuity for $435,000, leaving over $565,000 for an immediate gift to the charity.

On its face, everything seemed to make sense and in fact, it made me wonder if the ACGA rates were so low that it didn’t pay for donors do CGAs anymore!!!!! (just do this deal).

This was another one of those moments when I am wondering if planned giving will be a viable career in the future for me!

My response to the friend was that it seemed legitimate but let me obtain some independent quotes to verify the numbers they were talking about.

And, today, I just happened to receive the quote on this scenario and was also speaking to Bryan Clontz (, probably the top expert in CGA risk and reinsurance. Both the independent quote and Bryan confirmed that the chart was flat-out wrong in the quote it was using.

The cost buying a $61,000 lifetime annuity for a 74 year old was not $435,000, it was more like $565,000 or more. There goes the dream gift scenario.

Couple lessons learned.

#1 – Something that is too good to be true, is really too good to be true (i.e. it’s false!). Keep digging and you’ll figure it out what the catch is.

#2 – Always, always get quotes from independent sources.

#3 – Despite the false quote and misleading chart, the option of having a donor purchase a commercial annuity directly from a commercial annuity provider and then the donor gifting the difference (between what the donor might have given for the CGA and the actual cost of the commercial annuity) is a REAL GIFT PLANNING OPTION!

I like to say that I have worked on almost every possible gift arrangement out there but apparently not this one!

When would this be appropriate? According to Bryan Clontz, this option is used in limited circumstances like when the donor is from a state where the charity does not want to deal with their licensing requirement (like California or New York). Maybe when reinsurance is not an option and the gift is very large.

Bryan mentioned one important point – which tipped me off that the chart I had was just wrong. He said that the swapping of a commercial annuity instead of a CGA generally gave the donor a slightly less deduction. On the chart given to me, the donor’s deduction was over $100,000 greater with the commercial annuity option. That is how I figured out that whoever created the chart I was looking at had probably switched the cost of the commercial annuity with the left over charitable gift amount.

But, the good news is that there is another option out there to look at depending on the situation. I would only use this option very sparingly since it could leave the charity out in the cold if the donor loves the deal he/she is getting from the commercial annuity, so much so that he/she forgets the charitable gift part!

Here is link to Bryan Clontz’s article on the Planned Giving Design Center which includes discussion of this “new” gift planning option (option #4 in the article):

The article is very good but if you follow the link to Bryan Clontz’s website (see above) and check out his library of articles, you will find even more in-depth material on this gift option and more.