Everyone loves top ten lists. David Letterman perfected the use of the top ten list in his late night shows. Below is a list of the top ten oversights we have seen with charitable gift annuities. Hopefully your organization has never been a participant in anything on this top ten list.
Oversight #1: A charitable gift annuity contract was not created and signed by donor. If your organization does not have Crescendo or PG Calc’s Gift Annuity Manager, we have those programs and can create illustrations and contracts for you. To protect your organization and to meet most states’ requirements, we recommend that a gift annuity contract be created and signed by the donor for each gift annuity.
Oversight #2: The donor’s state laws regarding gift annuities were not considered before writing the gift annuity contract. For example, in California the charity must apply to issue gift annuities and pay a fee to apply. This must be done and approved by California before issuing gift annuities there. Once you find out the potential donor’s resident state, you can contact us if you are not sure if your organization is compliant in that state. On an annual basis we email each organization with its state registration and notification status for issuing gift annuities.
Oversight #3: The gift annuity contract was written using nicknames and PO box addresses. Contracts should use legal names and physical addresses.
Oversight #4: The correct state law required disclosure language was not written in the contract. The donor’s resident state disclosure language needs to be in the contract unless the donor’s resident state does not specify disclosure language. Otherwise, the charity’s resident state disclosure language should be written in the contract.
Oversight #5: The date of the first payment is not consistent with your organization’s other payments. To assist with managing the timing of future payments, it helps to prorate your payments and date all of your payments consistently.
Oversight #6: The illustration and contract were not updated with the actual gift date which can cause incorrect tax tables and charitable deduction. The gift date for gift annuities is determined in the same way as any charitable gift using the IRS guidelines. If the check is sent via the US postal service, then the date stamp on the envelope is the gift date. If the check is sent via UPS or FedEx, the gift date is the date your organization receives the gift. If the donor sends the funds via a credit card, the date your organization is credited with the funds is the gift date.
Oversight #7: In the gift annuity illustration, the highest Applicable Federal Rate (AFR), also known as the IRS discount rate, of the most recent three months was not selected. For gift annuities, the higher IRS discount rate increases the charitable deduction amount for this year for your donor. The only time you would not want the highest AFR is if the donor wants a lower charitable deduction in the year of the gift.
Oversight #8: Using rates higher than the ACGA suggested rates for gift annuities. The American Council on Gift Annuities’ suggested maximum rates are designed to produce a target gift for charity at the conclusion of the contract equal to 50% of the funds contributed for the annuity. We refer to this as the residuum of the annuity. The rates are further predicated on the following:
– An annuitant mortality assumption equal to a 50/50 blended of male and female mortality under the 2012 Individual Annuity Reserving Table (the 2012 IAR)
– A gross investment return expectation of 4.25% per year on the charity’s gift annuity funds
– An expense assumption of 1% per year.1
We recommend that all organizations use the ACGA suggested rates. When an organization applies to write gift annuities in some states, the application requires the organization to indicate which rates will be used when issuing gift annuities. By always adopting and using the ACGA rate schedule, your organization simplifies the gift annuity writing process. The ACGA rates are designed to assist with compliance and in making available a residuum to your organization after the annuity matures.
Oversight #9: Not including revocation language in the gift annuity contract when donor and annuitant are non-spouses. The revocation language may permit the annuitant to receive the gift annuity payments while avoiding gift tax on the annuity since it can be revoked. It also allows the donor flexibility in being able to dissolve the annuity via a will.
Oversight #10: Not having enough of a cushion in the gift annuity fund to cover market fluctuations and annuitants’ longevity risk. We recommend that each organization have an annuity risk, operating, and distribution guidelines document. These guidelines outline how the organization monitors risks to the gift annuity pool. Many organizations include a cushion over the New York reserve requirement since New York has one of the highest reserve requirements. Furthermore, many organizations only withdraw for matured contracts when sufficient funds are available to leave the cushion amount over the reserve intact. If you would like assistance in drafting these guidelines for your organization, we have a template that will contribute to your discussions.
Even though you won’t see this top ten list on late night television, we hope that it was enlightening and informative. Cornerstone Management wants your organization to have a successful gift annuity program that will ultimately lead to happy donors and lead to residuum gifts for your organization.
Learn more about Cornerstone Management’s services: OCIO, Planned Giving, Gift and Estate Consulting, and Asset Management Consulting services.