The rising popularity of charitable gift annuities

Money Matters

By Cozey W. Baker Jr.

Fundraising is the lifeblood of nonprofits. When the economy is unsteady, as it has been for a while, these organizations must work harder than ever to maintain and expand donor contributions in order to advance their mission. The nonprofits’ search for attractive ways to encourage donations has led to the rising popularity of Charitable Gift Annuities.

A “Win-Win” Situation

Many altruistic individuals express an interest in gifting assets to a non-profit they support. Yet, a common concern is that the donors themselves may need the assets personally, especially during retirement. A Charitable Gift Annuity (CGA) is an arrangement whereby the donor gifts cash or other assets to a non-profit in return for regular, guaranteed income payments for life. The contract is mutually beneficial: the charity gets a donation it may not have otherwise received, and the donor enjoys a tax deduction for a portion of the donation as well as guaranteed lifetime income.

The Risk of CGAs

As useful as they are for fundraising purposes, CGAs can be challenging for non-profit organizations to administer. Since a CGA promises to pay income to the donor for life, the non-profit must make sure there are always enough funds to meet its contractual obligations. Usually, the charity will invest the entire gift and not use any portion of the gift for its charitable endeavors until the payment obligation ends. Market risk can threaten the value of the organization’s investments. This is certainly happening now. And, the longevity of donors (and, hence, the number of years the non-profit must pay income to them) can erode the residual value of the gift – in some cases, leaving no gift at all for the non-profit.

Transferring the Risk

Reputable insurers like New York Life are invaluable for helping non-profits mitigate the risks of CGA programs. Through an arrangement commonly known as “reinsurance”, the non-profit can use a portion of the donation to purchase a Lifetime Income Annuity from New York Life.* The income paid from the insurer on the income annuity will cover the non-profit’s obligation to the donor, and the non-profit can put the remainder of the donation to work immediately (subject to state insurance department regulations).**

Reinsurance helps non-profits transfer risk to insurers whose business it is to manage precisely the risks associated with income annuities. By purchasing an income annuity that matches the charity’s scheduled payments under its CGA, the charity can ensure that there will be funds available to support the charity’s payment obligations to donors, regardless of market ups and downs.

* New York Life refers to both New York Life Insurance Company and New York Life Insurance and Annuity Corporation (NYLIAC). NYLIAC is a wholly-owned subsidiary of New York Life Insurance Company. Lifetime Income Annuity contracts are issued by and are solely the obligation of NYLIAC.

** State laws vary on the use of immediate annuities to reduce reserves that charities must maintain in connection with gift annuities. Charities should consult their legal advisors on this issue.

This educational third-party article is being provided as a courtesy by Cozey W. Baker Jr., Agent, New York Life Insurance Company. To learn more about the information or topics discussed, please contact Agent, Cozey W. Baker Jr.; at 9921 Dupont Circle Drive West, Suite 210, Fort Wayne, IN 46825 and telephone number (260) 416-5700 ext 245.

This is part of the November 4, 2009 online edition of Frost Illustrated.

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