Pacific Business News

May 19, 2006

Is charitable gift annuity right strategy for you?

by Sally Little

As baby boomers reach retirement age and consider transferring some of their assets to tax-exempt nonprofit corporations, one option is buying a charitable gift annuity.

This is a contract under which an individual transfers cash or other property to a 501(c)(3) tax exempt charitable organization, conditioned upon the right to receive a specific sum of money for life.

Since a charitable gift annuity is transacted between a nonprofit and the donor without any required intervention from an accountant, financial planner or attorney, any person considering a charitable gift annuity should use caution and due diligence.

The following tips will help consumers determine whether or not to proceed with buying a charitable gift annuity.

*Check the nonprofitís assets. By law, all nonprofit educational foundations and organizations issuing charitable gift annuities must maintain a net worth in the State of Hawaii of not less than $200,000 in cash, cash equivalents or publicly traded securities, exclusive of the assets funding any annuity. The nonprofit must also maintain a segregated reserve account equal to its outstanding charitable gift annuity agreements with a surplus of ten percent of the reserves or $100,000, whichever is higher. A copy of the nonprofitís Form 990, informational tax return, will yield this information.

* Determine the nonprofitís longevity. A nonprofit educational foundation or organization must have been in business in Hawaii continuously for at least ten years to offer charitable gift annuities. Go to www.hawaii.gov/dcca/areas/breg/main/about, click on business name search, type in the name of the nonprofit and this will give you information on the history of the nonprofit corporationís status.

* Look for disclosures in your contract. The State of Hawaii requires the nonprofit to prominently display on the first page of the charitable gift annuity agreement that this annuity is not insurance, not subject to regulation by the insurance division in Hawaii and not protected by any state guaranty fund. The Federal Philanthropy Protection Act of 1995 also requires the nonprofit to provide all prospective donors with a disclosure statement outlining the guaranteed payments and frequency, how the charity manages its assets, and so forth. A sample gift annuity disclosure letter is available at www.acga-web.org/sumfunds.html.

* Request a copy of the nonprofitís annual statement relating to issuance of charitable gift annuities. Every organization in Hawaii offering charitable gift annuities must submit this annual report to the Department of the Attorney General stating that it is in compliance with the laws governing these annuities. To request a copy you may contact Hugh R. Jones, Supervising Deputy Attorney General at 586-1473. A sample of the report is available at http://hawaii.gov/ag/charities.

* Examine the rate you are offered. The American Council on Gift Annuities (ACGA) publishes a schedule of suggested charitable gift annuity rates. A nonprofit may offer any schedule of rates it desires, however; most follow these suggested rates. As a result most rates are identical. The schedule of rates is available at www.acga-web.org. If you are being offered a higher or lower rate, ask the nonprofit to explain their rationale for setting the rate. If the offered rate is too high, the nonprofit may be required to use its assets to fulfill the terms of an agreement. This could affect the solvency of the nonprofit.

* Understand your tax deduction. Taxpayers who itemize deductions may claim a charitable deduction of a portion of the original gift. This deduction is equal to the amount of the contribution less the present value of the payments that will be made to the donor and/or other beneficiary during their life. The nonprofit should give you these tax calculations. Be wary of any person who informs you that the entire amount of the annuity is tax deductible at the outset.

* Create a relationship with the nonprofit. Ask the director of development for a tour of the nonprofit, learn about its programs an d meet with the CEO/executive director and chairman of the board of directors. Review their organizing documents and From 990 as well as their annual report.

* Require a signing ceremony. Never transact your gift annuity agreement through the mail. Always make out your check or transfer funds to the nonprofit. Never make out your check or transfer funds to another entity or the director of development/planned giving. All reputable nonprofits will arrange a signing ceremony with senior staff members, the CEO/executive director and members of the board of directors.

* Seek independent legal and tax advice. Donít enter into a charitable gift annuity agreement without consulting their lawyer, financial planner and/or accountant. The director of planned giving should encourage you to do so.

Back to Articles Index

Copyright 2006, Entrepreneurial Solutions, LLC