Bequest Management

Should You Start a Charitable Gift Annuity Program? A Decision-Tree Approach

January 17, 2021

Is It Worth Starting a Charitable Gift Annuity Program

Charities of all types and sizes offer charitable gift annuity (CGA) programs to their donors. The lure of CGAs is undeniable.

Donors like these donation vehicles and tend to like the charities that offer them.
Having CGAs on the major gift menu is an effective way to establish an ongoing relationship of communication and trust with valued supporters.
It is good business when a check or deposit with the charity’s name on it shows up in the donor’s mailbox or bank account every 3, 6, or 12 months.
In most cases, a CGA program can have a beneficial effect on a charity’s assets. Annuity revenue that exceeds the required reserve amount is available for immediate use. The “residuum” (any amount left in reserve at the donor’s death) also belongs to the charity, functioning almost as a mini-bequest, but with no probate complications.
Speaking of bequests, there is some evidence that a CGA arrangement with a donor is a harbinger of an eventual bequest. There is evidence against that view as well, but there is no question that annuities tend to cement relationships with supporters and may encourage testamentary gifts.

So why would you not offer CGAs? This posting presents — necessarily in schematic form — a “decision tree” for reaching a tentative answer to that question.

Is Your Charity Ready to Commit Fully to CGAs?

A charity should be “in” or “out” of the CGA market. This is not a dip-your-toe-in-the-water proposition. There are legal and financial undertakings involved whether a charity issues one CGA or one hundred. More to the point, as a matter of economic vitality, it is important to have a constant flow of money into and out of any annuity reserve account. The logic of that should be obvious.

Suppose that a donor purchases a large annuity when annuity payout rates are high. The payments to the annuitant remain the same for life. If the one large annuity represents a disproportionate share of the reserve account (or, God forbid, the whole account), the arrangement could quickly turn into a losing proposition for the charity if the investment market takes an extended downturn. Even if the reserve account is losing money, annuitants have a legal right to payments.

A CGA program is a long-term commitment. What happens if a major donor (and bequest prospect) wants an annuity, and your charity does not issue them? It is possible to “outsource” annuity issuance for such a “one-off.” While this may not be a perfect solution, it is preferable to the alternatives of issuing a single annuity or, even worse, sending an important supporter to a competitor. This outsourcing may also be an alternative for charities that decide to stay out of the CGA business.

Note that while CCK is not involved in the outsourcing process, we could advise you on how it works and possibly direct you to potential providers.

Are Your Target Donors CGA-Appropriate?

In our experience at CCK, the best candidates for a successful annuity program are charities with an established and substantial base of regular annual donors. It is also important that the age demographic of those donors be diverse. CGAs are typically appropriate only for persons aged sixty and above.

Are the Regulatory Burdens of a CGA Manageable?

Both the federal and individual state governments regulate CGAs. Some states impose requirements that are quite burdensome. Others have less stringent rules, and some have no specific annuity regulations. If a charity’s donors are mostly in a few states, the regulatory issues may be minimized, depending upon the states. Launching a nationwide CGA program is a big undertaking, appropriate only for larger, well-established, and financially secure organizations.

Even though annuities are charitable gift instruments, they resemble commercial annuities and other financial products. It is therefore predictable that they are the subject of extensive regulation. Relevant federal laws deal primarily with donor disclosure as well as the tax implications of CGAs for both the donor and the charity. The bulk of CGA regulations are issued by states and can involve:

Disclosures to annuitants, usually of the consumer protection variety
The precise form and content of annuity contracts
The possible filing of annuity contracts with the state
The application for a permit to issue CGAs
Investment vehicles chosen for annuity monies
Annual financial reports on annuity activity

Are the Financial Burdens of a CGA Manageable?

The regulatory burdens outlined above come with a cost, whether using internal charitable personnel or the engagement of outside professionals. In addition, there is the matter of living up to the charity’s part of the bargain by tracking and making periodic annuity payments. Donors count on CGA disbursements for living expenses and expect — rightly — prompt and accurate payments.

Depending upon the state(s) in which a charity issues CGAs, regulatory compliance can involve the hiring of an actuary to assess the health of the mandatory annuity reserve account. Where applicable, this is an annual — not one-time — expense.

Will Your Organization Try to “Cut Corners”?

Charities sometimes are inclined to “bend the rules.” The motivations behind this are often admirable. Usually, it is to save money for use in charitable programs. Sometimes, it is to please or cultivate a donor. But perhaps nowhere in the world of exempt organizations can the tendency to rule-bend have more disastrous consequences than in the CGA arena. We have published a separate discussion that highlights Charitable Gift Annuity Pitfalls.

Are CGAs for You?

How did you answer the questions above? If you got “yesses” all the way down, your charity may be a suitable candidate for such a program. If you hit a “no,” it may be time to get additional professional advice. Either way, your decision should not rest solely on this tree.