Presented by

Cathy R. Sheffield, MBA, CSPG, CFRE

for the

National Catholic Development Conference

on

September 14, 2015

No Fear: Launching a Charitable Gift Annuity Program

Historical records indicate some institutions were marketing CGAs in the late

19th and early 20th century.

The American Bible Society is credited for pioneering the first CGA program in the United

States beginning in 1831 when a merchant in Boston first donated a gift of money to the charity in

exchange for a flow of income.*

*www.americanbible.org

Gift Annuities

According to the American Council on Gift Annuities, 4,000 + organizations and

institutions now issue CGAs

Gift Annuities FYI

A gift annuity is a contract (not a trust) under which a charity, in return for a transfer of cash,

marketable securities or another asset, agrees to pay a fixed amount of money (payment) to one or

more individuals, for their lifetimes

Hybrid: part charitable gift and part annuity

“split interest gift”

Gift Annuity Defined

Annuitant: Individual(s) to whom the annuity payments is paid

Annuity: Fixed stream of income payable in annual or more frequent installments over the life/lives of the annuitants

Annuity Payment: Not “income” for a portion of the payments are considered to be a partial tax-free return of the donor’s gift

Gift Annuity Terminology

The gift, given irrevocably, becomes part of the charity’s assets, and the payments are a general obligation of the charity

The annuity is backed by the charity’s entire assets, not just the property contributed

Annuity payments continue for the life/lives of the annuitants and not ONLY as long as the asset remains in the Gift Annuity Fund

Gift Annuities in a Nutshell

While the charity may spend a portion of the contribution immediately, it must maintain sufficient reserves to meet annuity obligations and satisfy regulatory requirements of each state in which the charity issues gift annuities

Charity should track the ongoing value of each gift within its gift annuity fund, so it can withdraw the correct market value residuum

Gift Annuities in a Nutshell

Immediate Gift Annuity Deferred Gift Annuity Flexible Gift Annuity

Types of Charitable Gift Annuities

Inexpensive to establish and not complicated Provides an income stream for life/lives of the

annuitants Immediate income tax charitable deduction based on

age, payout rate, earnings assumptions and IRS discount rate

Prospects are generally older and may have less wealth Lower interest rates and lower inflation increase the

attractiveness of this plan

CGA Characteristics and Advantages

Cash (most common) Particularly when CDs come due

Appreciated securities Avoid immediate capital gain on the conversion

Real estate (charity beware!) Be mindful that some states prohibit donors from

using real property for a gift annuity

Property Appropriate for Gift Annuities

Charitable deduction - portion of the transaction that is considered a gift is eligible to be included as a charitable contribution on the itemized deductions part of the federal income tax return

Income tax savings - part of the annual amount the donor receives is considered a tax-free return of capital, excluding it from gross income until they reach their life expectancy

Estate tax savings - if the donor and their spouse are the only beneficiaries, the value of the annuity may not be taxed in their estates (It may qualify as a marital deduction)

Tax Considerations of Gift Annuities

Typically, gifts of cash or gifts of long-term appreciated securities will be used to create a CGA ( approx. 90%)

The federal income tax deduction eligible to claim falls under the same contribution ceilings as for an outright giftFor cash gifts, the donor can claim a deduction up to 50% of their AGI, 5 year carry overFor gifts of long-term appreciated property, the deduction can be claimed up to 30% of the donor’s AGI, 5 year carry over

Tax Considerations of Gift Annuities

Charitable gift annuity tax consequence calculations require the following information:

A portion of each annuity is included in the recipient’s gross income: ordinary income, capital gain and cost basis

Tax Considerations of Gift Annuities

Ownership of property: DonorAnnuitant: Donor

Ownership of property: DonorAnnuitant: Spouse

Ownership of property: DonorAnnuitant: Donor, then spouse

Ownership of property: DonorAnnuitant: Spouse, then Donor

Ownership of property: DonorAnnuitant: non-spouse

Ownership of property: DonorAnnuitant: Donor, then non-

spouse

Ownership of property: DonorAnnuitant: non-spouse, then

donor

Ownership of property: Donor and spouseAnnuitant: Donor

Ownership of property: Donor and spouseAnnuitant: Donor and spouse –

Joint and survivor

Ownership of property: Donor and spouseAnnuitant: Someone else

Ownership of property: Donor and spouseAnnuitant: Donor, then non-spouse

Ownership of property: Donor and non-spouseAnnuitant: Donor and non-spouse,

joint and survivor

Ownership of property: Donor and non-spouseAnnuitant: Donor

Ownership of property: Donor and non-spouseAnnuitant: Someone else

Donor/Annuitant Combos for Tax Consideration

Gift should result in a significant residuum with risk to

charity minimal – 50%, or so Rates should be lower than commercial rates Rates should be high enough to attract donors ACGA rates should have credibility so that most

charities will continue to follow them Life expectancies are based on the 2012 Individual

Annuity Reserving Table Expense assumption is 1% Investment Return Assumption is 4.25% (minus 1%) Additional assumptions for deferred CGAs

Gift Annuity Rate Assumptions

American Council on Gift Annuities:www.acga-web.org

Gift Annuities Rate Sample

http

://al

umni

.har

vard

.edu

/way

s-to

-giv

e/pl

anne

d-gi

ving

/pay

-inco

me/

cga

Gift Annuity Contract

Required for all gift annuities Some states require unique, state mandated

disclosure language (The Philanthropy Protection Act of 1995)

Planned giving software provides contract agreement samples (PG Calc, Crescendo, etc)

Consider the primary legal residence (state) where your donor (and/or annuitant) resides – rely on tax counsel to run your program

Gift Annuity Contract

Typically a simple, 1 page document

Prepare 2 original documents for signature Donor receives a signed original

Charity received a signed original

Recommend financial advisor and family review

Gift Annuity Contract

Name of donor(s) Legal address of the donor(s) Name of the annuitant(s) Legal address of the annuitant(s) Date of birth of the annuitant(s) Social Security number for each annuitant

Gift Annuity Contract Requirements

Sequence of annuity payments Consecutive: A for life, then B, if B survives A

B for life, then A, if A survives B Concurrent and Consecutive:

A and B jointly, then survivor

Cost basis for gifts Holding period for gifts of capital assets Payment instructions Gift restrictions Right to revoke annuity interest

Gift Annuity Contract Requirements

Sample Charitable Gift Annuity ContractImmediate Payments

One Life - Donor is the Annuitant This Agreement is made between, the Donor and Charity, of City, State Zip.

Transfer of Property by DonorCharity certifies that the Donor, as an evidence of his desire to support the work of Charity and to make a charitable gift, on [date of gift] contributed to Charity the property the fair market value of which is $100,000.00.

Payment of AnnuityIn consideration of the property transferred by the Donor, Charity shall pay an annual annuity of $6,700.00 from the date of this Agreement and shall pay such amount to the Donor so long as he is living.

Payment Dates; First InstallmentThe annuity shall be paid in quarterly installments of $1,675.00. The first installment shall be payable on March 15. Subsequent installments continuing every quarter on the 15th of the month shall be in the amount of $1,675.

Birth Date of DonorThe Donor's date of birth is December 27, 1933.

Irrevocability; Non-assignability; TerminationThis annuity is irrevocable and non-assignable, except that it may be assigned to the charity. The charity’s obligation under this Agreement shall terminate with the regular payment preceding the Donor's death.

Uses and Purposes of GiftUpon charity's satisfaction of its obligation under this Agreement, an amount equal to the residuum of the gift shall be used by Charity for ____________.

Entire Agreement; Governing LawThis Agreement, together with Schedule A attached hereto, constitutes the entire agreement of the parties. This Agreement shall be governed by the laws of the state of state.

Disclosure Statement

Donor has received and read the attached disclosure statement pursuant to The Philanthropy Protection Act of 1995.

This Agreement is effective as of [date of gift].

___________________ ___________________Donor Charity Representative

Gift Annuity Calculations

Hallelujah!!

Considerations for Launching a Program

Among the most popular planned gifts, second to bequests Familiarity: CGAs have been around for over 100 years Contract is easy to create, understand and complete Promotes long-term relationships Enhances organization’s asset base Carry risk for the charity other giving methods do not Annuity payment is a legal and financial obligation Charitable intent is a must Avoid terms like “product”, “purchase”, “yield”, “rate of

return” and “guaranteed income”

CGA Risks and Rewards

Organizational education of benefits, risks and legal responsibilities (governing body and staff)

Explore state requirements (states in which you wish to issue agreements)

Complete application process with the state(s) Administration: self or vendor Software Marketing

Initial Steps to Establish CGA Program

Organization LongevityThere is a pipeline of prospective donorsDonors have confidence in the longevity of charityCharity has a stable/successful investment history

Corporate StructureArticles of incorporation & by-laws allow acting in a fiduciary role Organization has strategic plan focusing on perpetual issues that transcend generations of donors Gift Acceptance Policy

Organizational Considerations

Threshold Requirements Charity can meet state min. requirements Charity is financially secure Charity can afford administrative costs

Financial Administration Charity has an investment policy Charity has ability to maintain separate reserve fund Reinsurance to mitigate risk? Follow ACGA rates

Financial Considerations

Development Efforts Charity has an established, consistent program Staffing level supports management, front-line fundraisers, and administrative support  Is this a one-state/local charity, regional, or national in scope, requiring field staff in various regions of the country? PG program with a baseline bequest program Min. annuitant ages and gift amounts established Gift designation policies

CGA Fundraising Efforts

Adequate Staffing Staff members are available and knowledgeable Staff members have the legal and/or financial knowledge Charity has in-house or outside legal counsel available

Sufficient Training Staff members are sufficiently trained Education available for technical issues Ongoing education available to stay informed of changes

Ability to Administer Charity is staffed and structured to administer (Payments and 1099-Rs) Resources available to hire administrative firm

Program Management

www.acga-web.org/state-regulations

State Regulation of Gift Annuities

Marketing Gift Annuities

Primary Seniors (ages 60-80) According to ACGA, average annuitant is 77

Secondary Octogenarians (age 80 and up) Mid-lifers (ages 40-60)

CGA Target Audience

Consistent donors - longevity Board members Volunteers, subscribers and members Community-minded individuals not directly

connected Fixed income Female Single

CGA Prospects

Personal conversations Direct response/mail Web Generic organizational publications Advisor Networks

CGA Marketing Opportunities

Case Studies

Miss Philanthropist, 72, would like to make a charitable gift to Catholic Charities. However, she is on a fixed income and is worried about income. A friend suggested a CGA. Miss Philanthropist is now exploring making a gift of $100,000 in exchange for a CGA. Miss Philanthropist will receive:

5.4% annuity rateFixed payments totaling $5,400 each year for life$4,034 of each year's payments would be tax-free for a period of years (in this case, 14.5 years) and $1,366 in ordinary incomeAn immediate charitable income tax deduction of $41,510

Case Study #1

Ima Donor, age 75, not needing income at this time, is interested in deferring her annuity payments 5-years. She decides to contribute $25,000 cash for a 5-year deferred gift annuity that will provide:

An annuity rate of 7.9% Fixed payments totaling $1,975 a year Immediate charitable deduction of $14,676 $1,098 of each year’s payment would be tax-free and $877 ordinary income

Case Study #2

Mr. and Mrs. Generous, 65 and 68 years old, plan to donate $25,000 cash to their church.

They are deciding between an immediate CGA and a 10-year deferred gift annuity.

Immediate: 10-Year Deferred:4.3% 7.1% $6,872 deduction $10,725 deduction$1,075 annuity $1,775 annuity

Case Study #3

Mr. Big Stuff, 78, is considering donating $50,000 in stock to his church. The cost basis for the stock is $40,000. What are the summary of benefits for Mr. Big Stuff:

An annuity rate of 6.4% Fixed payments totaling $3,200 a year Immediate charitable deduction of $23,750 $1,999 of each year’s payment would be tax-free, $500 is

capital gain income and $701 is ordinary income Total reportable capital gain of $5,250 must be reported over

10.5 years and after 10.5 years the entire annuity become ordinary income

Case Study #4

Ms. Fabulous, 65, is considering funding a $50,000 FGA with cash to Catholic Charities. At this time she believes she will want payments when she is 70. What does a FGA look like for Ms. Fabulous?

Case Study #5

www.acga-web.org

www.pppnet.org

www.pgdc.com

www.crescendosoft.com

www.pgcalc.com

www.plannedgivingcompany.com

www.stelter.com

www.virtualgiving.com

Gift Annuity Resources

Questions

Cathy R. Sheffield, MBA, CSPG, CFREAll Saints Health Foundation, Fort Worth, TexasBaylor Scott & White HealthCathy.Sheffield@BaylorHealth.EduW: 817-927-6221