gift annuities

A Tale of Two Gifts


Right now, I am grappling with two potential complex gifts – as complex as they get.  One I am encouraging a smooth, careful approach to accepting it while the other I am pushing back against.  The question is why?

The smoothing sailing one is a gift annuity funded with real estate!  If you have ever taken my Planned Giving Boot Camp, you should know that I caution against even letting your donors know it’s an option.

So, what is different in this case?  I had one conversation with the donor and he relayed how he sincerely wanted to help the charity and cared deeply about their work, that he had done something similar already with a related charity, and that he was fine only receiving an annuity based on the net proceeds of the sale of the real estate. Oh, and he had a buyer who has purchased from him already – not bound legally but someone who has a track record with the donor.

In a ten minute phone call, all of the alerts were turned off. Donor isn’t pushing the envelope, is taking responsibility for the sale and its costs, and a clear winner in my eyes worth hundreds of thousands of dollars to my client.

Next is the one I am having trouble with.  This is for a private individual client but it is a charitable vehicle – a Shark-Fin Grantor Lead Trust funded with life insurance and an annuity.  This is as complex as they get and I should be ecstatic to be involved with this one.  Only problem is that I owe my client a duty to advise against doing anything that is likely to cause trouble with the IRS (or has good chance of being a disaster in anycase).

Firstly, what is a Shark-Fin Grantor Lead Trust funded with life insurance?  It is a lead trust (payments to charity, remainder to family) where the payments to charity are reduced during the “term” – usually the life of the donor – and where a balloon payment to charity happens when the term ends (i.e. the passing of the donor) – most of the balloon payment (from the life insurance owned by the trust) actually goes to the family as an estate tax-free gift.  This is in addition to a big upfront income tax deduction the donors take.

When all of the numbers are crunched, this is the most guaranteed “win, win” as you can find from a tax perspective!  Family gets big upfront deduction.  Annual income tax bite (Grantor trusts send all taxes on income in the trust back to the donor!) is lessened because it is based on small commercial annuity  payments to charity.  Family and charity are winners at the end.  No risks from a numbers perspective.  So, why am I being such a pain to the promoters of this plan?

Do a quick google search on Shark-Fin Lead Trusts and you might find several articles from competing attorneys and financial guys arguing whether these things work or not.  The conclusion from most of the articles is that there just isn’t enough guidance from the IRS.  That means proceed with caution.

In other words, the IRS may eventually look at these (it happens sooner or later) and decide that even though each of the steps in the deal are kosher and not nefarious, the program taken as a whole is a big tax avoidance scheme.  It works too well.

Several years ago, the IRS got wind that promoters had this deal where charities would own large insurance policies but would only be receiving around 10% of the death benefit – the other 90% would go to family tax-free!  The problem was that the donor was taking a 100% deduction for premiums paid through the charity but only giving 10% of the death benefit to charity (herein was the problem!).  Still, the promoters claimed there was nothing wrong and that the charities as owners of the policies could change beneficiaries at will.

IRS didn’t buy it and levied draconian penalties on the charities and families involved. Now, it is strictly forbidden for any charity to own life insurance policy that has any non-charitable beneficiaries. (in fact, it’s those same draconian penalties that makes us wonder if the IRS will somehow attack lead trust arrangements that own life insurance going to both family and charity)

So, with a team of high end promoters pressuring me more than I can withstand, I called the top charitable tax expert in the country (as according to me and many others). I assumed that before I even finished my first three to five words, that he would give me is usual stern warning of “stay away from this one Jonathan.” (meaning not only tell my client not to do it but also remove myself from the case altogether).

Strangely, his response was the opposite of what I expected!  He said as far as he could see, it worked.

So, I withdrew my objections and we’ll see.  Client still needs to decide to fork over a lot of $ to get this done as it requires purchasing a fully paid life insurance policy (as well as the annuity to pay the annual charitable amount). Oh, and the client will use a big law firm to draft and implement the trust (that’s our insurance policy if the deal ever goes sour!).

So, you never know – maybe I will be writing about two of the most complex gift scenarios very soon!

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).

The Value of a Gift Annuity Program

Measuring the value of a gift annuity program is not always as easy as “how much money did we make?”

In fact, if you add up all of the staff time dealing with headaches in administration, unexpected losses in the stock market, and annuitants living way past their life expectancies, you might actually come away with the conclusion that your gift annuity program is a money loser, possibly a huge loser.

Sadly, I have seen it several times where the lack of professional oversight and/or marketing/promotion and/or significant numbers of potential prospects have all contributed to serious disaster scenarios for charities trying to be in the planned giving business.

But, there can be a silver lining and the following story from NJIT hits the point right on the nail:

For those who didn’t click through, in short, NJIT just received word of a $5 million bequest from none-other than an apparently smaller level gift annuity donor.  Their own website summed it up very well:  “stunned.”

And, don’t think that maybe NJIT has some powerhouse gift annuity program and that it might not apply to your more modest program.  I consulted there for a few months several years ago, and it had plenty of room to grow and plenty of headaches to fix.

Why I love the story is that it clearly exemplifies the opportunity many planned gifts afford institutions: an opportunity for long-term, ongoing relationships with donors.  NJIT staff obviously recognized that opportunity, stayed in touch, and the result speaks for itself.

Ok, if you have gotten this far in this blog post, you deserve a little extra for effort.  There is another reason why I like this story – I actually spoke with Mrs. Hartmann (the donor in the story) in 2007 when I was filling in as the outsourced planned giving officer.  The name sounded familiar to me and I did a search on my gmail account to see if I had mentioned the name in any of my correspondence. Sure enough, there was a short note I drafted and forwarded to the secretary at NJIT to send out to Mrs. Hartmann in 2007.  It was a  short pleasant note, thanking her and her husband and offering to be of any assistance.

Just another little nicety that goes unappreciated by management until something like this happens.

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.