A financial instrument for good is not always a good fit
If the idea of getting paid for making a charitable contribution sounds too good to be true, a growing number of nonprofit organizations across the country have two words for you: gift annuity.
Donors who choose this option over the run-of-the-mill bequest can receive annual payments for life in the range of 5 to 11.5 percent of the lump sum donated, depending on your age and marital status. Some annuitants avoid hefty capital-gain taxes and take big write-offs at year's end, all while providing for an institution they love.
"It's very powerful as a tax-planning instrument," says Scott Oeth, a certified financial planner with Vector Financial Network in Minneapolis. And, he adds, powerful for feeling it's money well-spent: "Giving $100,000 to whatever it is - 'big blue' insurance company - and getting a stream of income back ... is nice, but what about giving $100,000 to your church or your favorite social organization and receiving a similar check back each month? Knowing they're getting the benefit of the difference there is probably pretty significant."
For all their virtues, however, gift annuities fit some financial situations far better than others, financial planners say. And as more and more charities roll them out, the importance of doing advance homework on the charity is greater than ever. "If you do a gift annuity with a lesser-known charity or a recently formed entity, there's always the possibility that they won't be around to fulfill their obligation to you," says Rodney Loesch, a certified financial planner in Columbia, Mo.
Exhibit A is currently on display in Maricopa County (Ariz.) Superior Court, where founders of the Baptist Foundation of Arizona are on trial for allegedly bilking $550 million from 11,000 contributors, including gift annuitants, before the foundation collapsed in 1999.
What's more, Mr. Loesch says, the finality of the decision - the annuity is irreversible - can make potential donors skittish about giving five or six figures to even the most reputable of organizations.
"I have a lot of clients who are interested," Mr. Loesch says, "but they have a hard time pulling the trigger. [Gift annuities are] something that's talked about a lot, but most of the time, people don't do it."
Gift annuities in the United States date back to 1831, when John Trumbull, a colonial artist, donated his painting collection to Yale University in exchange for a flow of income. Over time, they've proven especially popular in periods of low interest rates, since gift- annuity rates virtually always exceed those offered at local banks. They also provide a feeling of security for those wary of stock-market fluctuations, according to the American Council of Gift Annuities.
Figures aren't available on the exact number of institutions offering a gift annuity, but the ACGA says exploratory interest among institutions has surged since the late 1990s. This tool once used primarily by colleges and religious organizations is increasingly available to patrons of the arts, says ACGA chairman Frank Minton.
Donors are responding. In ACGA's 2004 report, 55 percent of 829 institutions surveyed said they had seen an increase in gift annuities over the past three years. Only 12 percent reported a decrease. The median value contributed to a gift annuity is $28,027.
For John Russell of Fairfield, Conn., gift annuities became a consideration 10 years ago when cashing out his stake in a public company would have meant painful capital-gains taxes. He instead donated shares to establish gift annuities at three schools - Choate Rosemary Hall, Yale University, and Denver University - which now provide him with extra income at age 76.
"It's almost as if you were able to give away twice as much money because of the capital gains" not incurred, Mr. Russell says. And because payout rates increase with age, he's pleased on that end as well: "It's kind of tough to find an income-producing instrument that's going to pay you 7 percent," which is the average return on his gift annuities. "It's usually less than that," he says.
Although gift annuities tend to pay higher rates than certificates of deposit or bonds, Mr. Minton cautions against looking to them for maximal returns.
"We promote gift annuities as a means of making a gift, not just as an option for people who are shopping for investments," Minton explains. "If a person is just looking for an investment, even with the tax deductions [considered with gift annuities], they're better off with a commercial annuity."
That's because the rates paid by gift annuities generally lag those paid by commercial providers, such as insurance companies, by 15 to 40 percent, according to ACGA analysis.
Accepting a lower rate isn't necessarily a sacrifice for donors, since lower rates help their chosen institutions to preserve capital. Gift annuities are structured to pay out less over time than the donor originally paid in. Yet for individuals who require a certain level of income from this instrument, shopping among favorite charities can deliver dividends, since 30 percent of institutions say they deviate from the rates suggested by the ACGA.
Still, charitable gift annuities aren't the best option for everyone who wants to make a gift and generate income simultaneously, says Troy Smith, a certified financial planner in Raleigh, N.C. For those with more than $200,000 to give - or for anyone who doesn't want to relinquish control over their investment - Mr. Smith recommends establishing a charitable remainder trust (CRT) instead.
"What's not being said to the donors is that they can control their own gift" if they use a CRT, Smith says.
A donor to a CRT can appoint himself both trustee and beneficiary of the income stream, Mr. Smith says, enabling him or her to decide how to invest assets that are earmarked to go ultimately to a nonprofit organization.
The result can potentially be higher returns for the donor and designated charity than those established years in advance through a gift annuity. And unlike a gift annuity, which commits funds permanently to one institution, a CRT allows a donor to change which institution is designated to receive the funds if, for instance, scandal should cause a change of heart.
Annuity owner Russell, however, still likes gift annuities because "you don't have to worry if the [charitable remainder] trust is going in the right direction. If it is, that's fine. If it's not, that's annoying."
Within the realm of gift annuities, nonprofits roll out multiple options. Payments can begin immediately or be deferred, say, until retirement. (Those choosing deferred payments tend to be in their late 50s and early 60s when they make a gift, while those choosing immediate payments are most often in their late 70s.)
A gift can generate income for an individual or a married couple. Colleges often offer a program by which the beneficiary could temporarily be a student enrolled at the school, in order to cover tuition costs.
Yet even with gift annuity options growing all the time, don't expect to start seeing lots of them promoted in the offices of commissioned salespeople, Mr. Oeth says. "I don't think you're hearing much about gift annuities," the financial planner says, "because no insurance agent is getting paid" to broker them.