Charitable Gift Annuity
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Charitable gift annuities provide donors with a low risk way to make a significant gift. The gift annuity provides the donor a secure a stream of income for the remainder of their lives, gives them a sizable current tax deduction, and enables them to make a significant gift to an organization that is important to them.
The way a gift annuity works is as follows. The donor makes a gift to an organization in the form of a financial contract with a charity. The organization invests the gift principle and pays the donor an amount annually. The annuity continues until the donor or the donor and their spouse are deceased. The amount paid to the donor is based on the age of the donor, or the combined ages of the donor and their spouse. The donor gets an immediate tax deduction for the gift. based on an IRS formula. The formula calculates the value of the remainder interest (the estimated amount that will be left over for the charity) given the ages of the donors. Once the donor(s) pass away, the remainder of the gift is given to the charity.
Rates of return range from 2% to 9% based on the donors age. Most reputable organizations will base their return schedule on the model provided by the American Council on Gift Annuities. Organizations that exceed these rates risk having to make payments after all the money is gone. The charity is still legally obligated to fulfill the annuity even if it begins to cost them money.
Why would a donor be interested in a gift annuity?
Gift annuities can actually provide a service to donors. Consider a donor who has a significant amount of their retirement nest egg tied up in a stock. If this stock does not provide much income return in dividends, then the tax liability from selling the stock would loom large in their minds. Just selling the stock could cost them 15-20% of their principal. For all intents and purposes, the tax liability freezes the assets.
Enter the gift annuity. The donor can give the stock directly to their favorite organization in exchange for a gift annuity. They reduce tax costs and guarantee income for the rest of their lives. They still might need to pay federal and state income taxes on the annual payments. So they should consult with a qualified professional on the tax consequences.
These tax benefits make the gift annuity a win-win for the donor. They avoid capital gains and preserve their nest egg. Their money provides a higher annualized rate of return. And they provide for the long term well being of an organization that they care about.
(Disclaimer – I am not an accountant or tax attorney, so please consult with a qualified professional on the legal details.)
Why would an organization want to provide charitable gift annuities?
A lot of organizations provide charitable gift annuities. The American Council on Gift Annuities’ member list will show you many organizations that are using this fundraising method. The gift annuity just another tool for fundraisers. It can help to overcome objections and encourage donors to make a significant gift.
Major gifts typically come out of a donor’s assets rather than their income. The charitable gift annuity recognizes the desire of many retirees to preserve their assets until their passing. The gift annuity does two things. It supports their long term financial goals. And the donor “locks in” a significant gift to the organization after they pass away. That’s why gift annuities are typically considered planned giving rather than a major gift.
The organization does take on some risk with charitable gift annuities, however. The donor might live significantly longer than predicted (my wife’s grandfather passed away at 98). Or the organization’s investment returns might be significantly less than forecasted. In either of those two cases, the gift annuity might actually turn out to be a liability that costs the organization money rather than providing a financial blessing.
Insurance companies have recognized this risk and created reinsurance products to help account for this risk. Reinsurance contracts protect an organization from losses in the event of an annuity contract that eats up all of its principle before the donor passes.
This risk is also the reason why a gift annuity program depends on achieving a certain scale in order to be effective. The more participating donors you have, the less of a difference one gift annuity will make on the success of the total program. Having more annuities spreads the total risk over more people and protects the organization from losing money overall.
How do I market a gift annuity program?
Generally speaking, the market for gift annuities is senior citizens who have been giving to your organization for a significant number of years. Young people are just not as likely to have a significant body of assets that they can turn into an annuity, and they are also more likely to be able to bear the risk of the stock market.
Once you have created your annuity program, you need to find ways to market the giving opportunity to people who might be interested. You might do this in a number of different ways.
- Direct mail – The most frequently used method for marketing a gift annuity program is through direct mail. This might be a piece that specifically addresses your new gift annuity program. It might be a mention of your gift annuity program on the reply devices that you send with your regular direct mail pieces, “Learn how a gift annuity can serve the mission and help your retirement planning.” It might be a mention in your newsletters. Remember that your target audience for this kind of giving vehicle is older, so if you are creating a campaign around the gift annuity program, try to target only your older donors.
- Planned giving – The gift annuity fits in naturally with your planned giving efforts. If you have invested in a planned giving officer, it is a tool that they can use when talking to donors about the best way for them to make a substantial gift to the organization.
- Website – If you offer gift annuities, be sure that you have information about them on your “How to donate” page on your website. It’s not likely that this page will pull a huge amount of traffic, but you want to make sure that the information is getting out there.
- Phone campaigns – A phone campaign might be a once a year phone-a-thon to a carefully selected set of donors who might have the ability and interest in gift annuities. Be careful with this, however, because you don’t want to seem too aggressive.
A word of caution about gift annuities.
The charitable gift annuity is planned giving option rather than a type of major gift. The gift is deferred until the death of the donor, so securing this type gift is not going to bear fruit for a significant number of years. Time and energy invested in charitable gift annuities will immediately impact your organization's bottom line, although studies show that donors who make planned gifts tend to increase their current giving as well. This makes sense, because a planned gift is a long term commitment to the success of the organization.
Also, most small organizations can’t handle the complexity and potential risk of a charitable gift annuity programs. The administrative overhead might overwhelm a small staff and prove to be more of a burden than a blessing. This is a more sophisticated form of fundraising that will require substantial resources to be effective.