WSJ article: GETTING PERSONAL: IRA Charitable Rollover Comes With Risks

For those who don't have subscriptions to the WSJ, here is the article mentioned in my previous post:

* DECEMBER 29, 2009, 2:44 P.M. ET

GETTING PERSONAL: IRA Charitable Rollover Comes With Risks

By Shelly Banjo
A DOW JONES NEWSWIRES COLUMN


NEW YORK (Dow Jones)--Donors who have tapped their individual retirement accounts for charitable donations under a popular temporary tax break may be in for a surprise come tax season.

In some states, distributions from a charitable IRA rollover may not be tax-free, as many charities have indicated in their promotional materials.

While these distributions escape federal taxes, they may be subject to income tax by states that don't allow charitable deductions and count IRA distributions as taxable income. Other states are facing delays in incorporating federal tax rules into state law.

In New Jersey, where taxpayers with an income between $500,000 and $1 million face a 10.25% rate, donors may pay more than $10,000 in state taxes for a $100,000 charitable IRA rollover. Donors who don't factor in extra income from an IRA distribution may mistakenly be bumped into a higher tax bracket.

Pushing for Congress to extend the IRA-giving provision, financial advisers and charities laud the extra tax break for generating an extra $140 million for charity since it was enacted in 2006.

Taxpayers ages 70 1/2 and older are typically required to make annual distributions from their retirement accounts (though distributions for 2009 were suspended). The distributions are included in their federal adjusted gross income and are taxed as such. The charitable IRA rollover lets taxpayers make donations directly to charitable organizations from their IRAs without counting them as income and paying federal taxes on them.

State taxes are a different story, says Eric Abramson, an estate and charitable planning adviser in Paramus, N.J.

"There can be a cost on the state income-tax level, and for a large gift it could mean a substantial income-tax hit. It's important to bring this to the client's attention and make sure the cost is quantified and handled appropriately," he says.

Overlooking state taxes could have wider implications for national charities such as the American Red Cross or United Way, where donations are already suffering from the strained economy.

"The last thing nonprofits need is to face the wrath of an angry donor who wasn't informed," says Jonathan Gudema, a planned giving consultant with Changing Our World Inc., a fund-raising and philanthropy consulting firm.

Many organizations, including The College of New Jersey and Overlook Hospital Foundation in Summit, N.J., state clearly in marketing materials that benefits apply only at the federal level.

"We find many of our donors are willing to pay the small price that this might increase their income taxes to reduce the assets held in a retirement plan," says Kenneth Cole, senior director at Overlook. "In some cases, IRA assets are the only funds they have to make a charitable gift."

Other charities have steered clear of handing out financial advice altogether.

"Legally and ethically we can't put ourselves in the position to dispense financial advice," says Ted Mills, associate director of gift planning at Princeton University. "We tell our donors twice or even three times to review any important decisions with financial advisers."

(Shelly Banjo is a Practice Management and Getting Personal columnist who writes about wealth management and philanthropy; she covers topics including the business of financial advisers, investment strategies and charitable giving. She can be reached at 212-416-2242 or by email at shelly.banjo@dowjones.com.)

(TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at TalkbackAmericas@dowjones.com. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments.)

Planned Giving in the news - WSJ reports on NJ Taxing of IRA Charitable Rollover Gifts

I am feeling a bit like the grinch.

I totally missed this issue of New Jersey taxing IRA charitable rollover gifts for 4 years. Then I hear a top attorney mention it in passing, put it on my blog, a conversation with a nice WSJ reporter (thanks for the quote!).... My guess is that there will be people paying taxes that might have just been overlooked - now that the Wall Street Journal reported on it.

Here is the WSJ story:

http://online.wsj.com/article/BT-CO-20091229-706347.html?mg=com-wsj

Just to understand this issue, a NJ accountant confirmed for me that NJ does not defined adjusted gross income (AGI) in the same way the IRS does (Most states do follow the IRS in this regard). And, yes, NJ requires you to add any IRA withdrawals (qualified IRA charitable rollovers or not) to your NJ AGI. NJ state income taxes range from the 5% to 6% for medium to semi-high income earners. 8% to over 10% to higher earners ($150,000 to $500,000 and up).

So we are talking about real dollars out of donor's pockets. The one NJ charity I asked about this (who did promote it but carefully stated that it only avoided federal income tax) said they informed everyone and they had not problems.

I hope that's true - now that the cat is out of the bag. What I mean is that this quirk in New Jersey's tax law, which for all I know could be unique among the states, was relatively unknown. Maybe your accountant would have been aware of it but why would you need to tell him (all accountants are men, right?)? And, if there is not an automatic reporting mechanism from IRA custodians to NJ tax authorities (like there is to the IRS), how would anyone in the NJ taxing authority know to go after the tax if not voluntarily reported.

What I am getting at is that this quirk was ripe for everyone to ignore and not pay any state income tax on IRA charitable rollovers. If was an unknowing donor of such a gift, knowing that I get no new charitable deduction, I wouldn't bother telling my accountant.

But now, me, the grinch, stirs up the pot, the WSJ picks up the story, and now accountants in NJ will be on the look out for these "gifts" to add them to your NJ AGI.

Or maybe not.

Happy holidays!

New York Times - Great Editorial on Estate Tax Shenanigans

When I read an article or opt ed piece and I agree with every word, it deserves a post:

http://www.nytimes.com/2009/12/28/opinion/28mon1.html

This one is right on point about the impending estate tax repeal in 2010 and the political process. Nothing further needs to be said.

Planned Giving Articles - Et tu, New York Times?

I better start reading the New York Times because I am almost missed this one by about two months.

The link is below but here is my introduction:

It's about the National Heritage Foundation (NHF) bankruptcy situation. The article starts out bemoaning the fact that NHF had to take $25 million of its Donor Advised Fund (DAF) money to settle with its 107 gift annuitants. Then the article moves into a loose discussion about gift annuities. Check it out if it interests you but please see my after-article comments below

http://www.nytimes.com/2009/11/12/giving/12FUND.html?_r=1&scp=1&sq=national%20heritage%20foundation%20gift%20annuities&st=cse

I was asked by a friend today about a line in this article that made a board member nervous.

I am going to try and keep my comments ask kind as possible. The article's beginning leaves out one crucial legal fact: DAF money is considered from a legal point of view to be TOTALLY and COMPLETELY UNRESTRICTED. That's the deal - sorry DAF donors. If the charity runs into financial trouble (like NHF did), DAF money is TOTALLY AND COMPLETELY AVAILABLE. Period. If the DAF donor doesn't like it, then start a private foundation.

That is why the legal cases of most of NHF's DAF donors were thrown out of court. It doesn't excuse any fraud committed by NHF in obtaining those donations.

Secondly, my problem with this article is that it seems to be pitting DAFs as the good guy and CGAs (gift annuities) as the bad guy. Or maybe not. I actually know the author, and I think she is a great writer, but something tells me that the editors messed this one up. I really couldn't respond to the question I received this morning because I had no idea where the article was going.

Third point - this is a quote from the article:

Faced with shrunken endowments, charities are seeking to bolster giving by heavily marketing gift annuities, emphasizing the income stream they offer.

The article offers no proof of this statement and if you asked me, I would say the opposite. I think charities have slowed their CGA marketing out of fear of the liabilities they are dealing with. Getting new annuities is actually a good idea for a basically healthy program but it has nothing to do with NHF or the initial part of the story.

There was an interesting story there - it just never came out. It is interesting to note that DAF money was used to pay off CGA donors of a charity going into bankruptcy. What was also interesting was the fact the CGA donor mentioned actually received back $131,239 from his initial CGA gifts of $235,000.

Considering what Madoff investors, as well as other ponzi scheme investors, will receive, I think the NHF CGA donors did pretty well. I am guessing that this donor got to keep his initial charitable deductions. He was barely out of pocket if you think about it. The story should have been how CGA donors had a right to receive something in the bankruptcy - and obviously were in a decent place in the line.

Something about the whole article bothers me - is it only me? Isn't there lack of focus? No wonder a board member is pulling a quote from the piece to cause some trouble. It took me a few minutes to figure out what it was talking about.

Holiday Greetings - December 31, 2009

With all of the focus on health care, Congress will apparently let the estate tax lapse.

They also let the standard end of year tax extender fall off the radar, too. There goes the IRA charitable rollover, for now.

Oh well.

RE: the estate tax. Some victory against the death tax. What the idiots crying about the so-called death tax never say is this:

#1 - in 2010, estates will start paying capital gains tax on capital gains over $1.3 million (we had an unlimited step-up in basis at death until now). Who knows, maybe this will generate more money for the government than the dreaded death tax (at least it will tax less wealthier decedents). The government tried taxing capital gains at death in 1976, apparently it was a disaster from record a keeping point of view and was quickly repealed. The big problem is determine the basis (ie..the starting point for starting the cap gains tax on so-called profits). The rule is that if you can't determine the basis, you are supposed to assume a zero basis (ie...apply the tax to 100% of the value of the asset).

#2 - Impact on charitable bequests: Most charities receive their bequests these days from non-estate tax paying estates (ie..estates under the $3.5 million exemption). Sounds like the repeal of the estate tax won't affect charitable bequests. The only problem I see is that when you break down the estate tax filing numbers reported by the IRS, you find a very high percentage of annual bequest dollars coming from the larger, higher estate taxed estates. My theory: the $5 million+ estates do use attorneys in efforts to avoid estate tax; a lot of lawyers might advise their clients to not bother with their charitable bequests without the incentive to avoid estate taxes (at least for 2010). It will be interesting to see if there is an impact or not on the overall numbers for U.S. bequests.

#3 - At the rate Congress moves on this issue, January 1, 2011 will be here quicker than you think. Probably without an adjustment to the estate tax laws, and the law will revert back to 2001 law: $1 million exemption and highest bracket of 55%. In other words, with inaction, Congress will bring us back to the good old days where my dad might start worrying about estate taxes again. Not so bad for charities if you ask me - might fuel another growth period in planned giving.

I guess we are headed for bedlam in estate tax issues for a year or more.

To think I was able to write this while my 4 kids are all over me is a mystery! Please forgive the typos and enjoy the holiday break.

Jonathan

Planned Giving Legal Tidbits - Bequest Pledges

This post is one that I've been itching to write since last week. Please read it carefully and think it over (even if you are not a New York fundraiser - these discussions are always relevant and they at least give you something to ask counsel in your own state)

I mentioned in the previous Legal Tidbits post that pledge agreements in New York that involve naming recognition are legally enforceable, binding commitments. Technically binding out of one's estate, too. And, naming recognition would include a named scholarship in addition to an actual name on a plaque somewhere.

The follow-up question I had as a direct result of hearing this info is what about bequest pledges where the naming only takes place upon the receipt of the pledged funds at death?

Surprisingly, top notch counsel said that case law in New York supported what he termed a contract to make a will as also being a binding obligation upon the parties (namely the estate to pay the pledge).

In legal terms, we are looking for consideration (more simply understood as value exchanged) in a contract context. New York courts not only agree that receiving a named honor in exchange for a pledged gift is consideration to create a binding contract, but the courts agree that a pledge to include a charity in your will that creates an agreed upon naming honor when the bequest matures (gotta love planned giving talk) is also a binding agreement (albeit contingent on both sides fulfilling their promises).

What I am getting at is that in New York, a pledge agreement whereby the donor agrees in writing to include a charity in his or her estate plan in some form or another to receive a naming honor at the time funds reach the charity is ENFORCEABLE as a binding pledge (whether you are included in the estate documents or not).

Long sentences, I know, but you have to say wow.

Sign on the dotted line and it's a gift? One of my clients - closing this fall alone over $5 million of these - said they didn't plan to actually list these commitments on their books. Funny thing - from both the accounting and legal points of view, they should be on the books.

OK, I would advocate some substantiation - like are we really in the will or does this donor really have these assets or is there an estate fight brewing. I would keep these for older donors generally. But, they are not only good planned gifts, but they are bookable (at least at present value).

Stay tuned for part 2 about bequest pledges entitled Don't try these at home. Just a word of caution before you go out and have hundreds of folks sign up.

Planned Giving Legal Tidbits - Pledges and State Tax Implications for IRA Rollover Gifts

I just returned from the annual planned giving quiz given by one of my favorite planned giving lawyer/guru in the field (He doesn't use the internet so I'll leave his name out but it should be pretty easy to figure out).

I learned two ideas - really important ones.

1. New Jersey will tax your New Jersey donors for making IRA charitable rollover gifts! Income tax, that is, on the IRA withdrawal.

That's what I heard. It's really too late to do anything about it if you have been encouraging donors from this state. It has to do with the fact that New Jersey doesn't offer a charitable income tax deduction... New York and Connecticut are fine.

I am wondering if there is a mechanism for New Jersey tax authorities to be notified when someone makes an IRA rollover gift?

My suggestion: cross your fingers regarding the past; confirm for the future (if it gets extended again) and put a caveat on all of your marketing materials that mention this option (especially if you are a NJ charity or have a lot of NJ prospects).

2. My favorite planned gift this year is the irrevocable bequest pledge. Why? Well, let's say that with life income gift business down, I can still look to many millions of closed gifts with these arrangement this past year.

Yes, the person sitting to my right today was from an Ivy League school which has a policy to do no binding pledges - fine if you are in the Ivy League. And, yes, they are tricky - and quite often very problematic when they mature.

Here is what I learned: in New York, all "naming pledges" are legally binding, including named scholarships. That might seem like an obvious point but hearing it from a top attorney puts it on another level for me. You don't need particularly special language - just something in writing where the charity says that it will name something in exchange for this gift.

Of course, the repercussions of this point can be negative. The problem that occurs is when a donor agrees to give the money for some naming opportunity, most often no one has the chutzpah to ask about the source of those funds. Technically, once the pledge is made, the donor (in theory) can't have his or her private foundation pay off that pledge.

The other long standing issue with all pledges, particularly one's that are likely to be fulfilled from someone's estate, is their enforceability. It's a nightmare if you are not actually named in the estate.

A topic for future posts.

Underwater Endowments Training in New York

I have to admit that I am a bit of a cynic when it comes to educational programs. Usually, the speakers are going over things I know already and frankly, I am part of the ADD generation with about a 3 second attention span.

So, when I got ready to attend the NYC bar's 3hr presentation on Underwater Endowments (held last week), I packed plenty of snacks and extra reading material.

I've written on the topic, organized several presentations on it. What else can I learn except: when is New York going to pass UPMIFA!?!

I was wrong. I am going to use this opportunity to list some very important facts that I picked up (please go to previous posts on UPMIFA for background). All of these points are specific to New York (especially since New York still maintains the old UMIFA) but I still recommend that non-New Yorkers look over these tidbits because they are definitely food for thought.

1. When does an organization have an affirmative duty to literally restore an underwater endowment to its historic gift value (ie..put real money into the endowment account)?

I used to think this was an accounting canard. Wrong I was - at least partially. In New York, the AG says that if a permanent endowment goes below its historic gift value due to application of the org's spending-rate policy, then it does have an affirmative duty to replenish the endowment! On the flip side, if you can attribute the drop to market depreciation, you don't have an affirmative duty.

Wait a second. This doesn't make sense. You apply your spending rate, there is nothing wrong with that when you are not underwater. Then the market tanks and the fund goes negative. When is it the fault of the spending rate and not the market? A question I should have asked. It seems that the AG takes the position that if the market appreciation generally lagged behind the spending rate, the board should have adjusted the spending rate down to prevent the fund from going underwater. In other words, it's pretty murky in New York when to blame the spending rate vs. the market decline.

Advice for all boards (in UMIFA or UPMIFA states): watch the funds, know the original funding amounts of each fund, be aware of long term goals of each fund, spend less to extend life of fund of each fund when need be.

2. Have you ever had auditors or accountants claiming that you have bring back the permanent endowments to their historical gift value on your financials (aside from the NY AG's approach mentioned about but from an accounting point of view)? To me, this was part of the accountant's canard mentioned above. It turns out that there is some truth to this (and this may or may not apply to apply to UPMIFA states, too).

The accounting principals require that on your books, any underwater permanent endowments must make up the deficit from other assets on your books (ie..unrestricted assets).

Practically, this does not mean transferring funds from unrestricted accounts to the permanent endowment accounts. It means that the books have to allocate unrestricted assets towards the negative balances, all on paper though.

So if its only on paper, what's the big deal? The big deal is that underwater endowments drag down your bottom line net assets which might violate debt covenants (agreements with lenders to ensure that the organization maintains a certain level of assets).

Two solutions to this problem are: 1. try to make sure debt covenants are drafted to exclude the negative impact of underwater endowments; and 2. your financials should show negative underwater balances as separate and explained items.

3. I know New York is peculiar but the current proposed form of UPMIFA is a real doozy. There was some excitement that NY might include a presumption that greater than 7% spending rates are presumed to be imprudent. Not such a big deal to me but charities should rather do without it (still, my advice is to take the new law regardless of this provision).

The doozy though (for the proposed NY version) is a 90 day check the box provision. What's this??? UPMIFA, if passed as currently proposed in NY, would require all charities with living permanent endowment donors to send a letter to those donors giving the donors 90 days to decide whether the donor wants his or her fund to follow UPMIFA or to stay with the old UMIFA law. Actually, the wording is really screwy and assuming the law requires charities to use the law's language in the letter, it will give donors the impression that their choice is between the charity spending their entire fund (new law) vs. maintaining their fund (old law). Yikes for New York charities.

4. Incorporating in Delaware (or wherever) may actually help avoid NY's insane laws regarding endowments. When I heard this, I made them repeat it. According to the big shot attorneys on the panel at the bar conference, for these purposes only, the state of incorporation would control. This is a good question for your general counsel but some New York charities may already be off the hook in this area if they were incorporated in other states.

5. NY's proposed law, and included in other state versions, has an escape clause for older, smaller endowments. The uniform version of UPMIFA included a provision for less than $25,000 and older than 20 years permanent funds. It permits charities upon notice to their AG (90 days to protest) to release or modify restrictions if the purposes are unlawful, impracticable, impossible or wasteful. NY's version increased this old endowment escape clause to $250,000! I know NJ included a $250,000 version of this clause, too! NY's proposed version requires notice to living donors - not sure if this applies to other state versions.

I would say that if this law gets passed in NY, and certainly the 42 other state that have passed a form of UPMIFA, it would be time to clean up all of those old, out dated endowments.

For non-New Yorkers, check your UPMIFA (if you have it).

Happy Thanksgiving, New York Style

Happy thanksgiving from Andrew Cuomo, NY Attorney General, that is.

I've been home with some sort of flu for two days and I wanted to wish everyone a happy thanksgiving. I couldn't resist sharing the following ethical quandary facing Cuomo - a story New Yorkers know all too well:

http://www.youtube.com/watch?v=x2vlARdBGzY

For years, these guys (the UHO tables through NYC) raising money for the "homeless" have been aggressively after everyone walking by. They are collecting for the homeless - themselves, that is. Problem is that they have official sanction as a legitimate charity and they are not quite what we expected.

Basically, a guy figured out a way to professionalize begging in NY. I actually like it better than the non-professional beggars who can sometimes come across as threatening.

In NY, everything like this is about politics. Cuomo might have picked the wrong target this holiday season as it makes him look like a scrooge.

Planned Giving Ethics - Merrill Lynch Case Part 1

As mentioned last week (see http://plannedgift.blogspot.com/2009/11/planned-giving-nightmare-crt-case.html), there was a recent court ruling out of the State of Delaware regarding a really botched charitable remainder trust situation.

Rather than trying to review the entire case in one post, I plan on writing short posts related to the many ethics issues raised in the case. In other words, I think the case itself is great for training purposes - getting accustomed to the nuances that we planned giving officers should be aware of, but the ruling itself should have little or no impact on the field.

If you try reading the case (http://courts.delaware.gov/opinions/%28jt5l5vngapjgmyzobwkq5ejj%29/download.aspx?ID=126540), you'll see some nice biographical info on the victims but here is my short version (at least the relevant facts):

Husband and wife (she is 75 and he is 10 years or more older) save over $800,000 in Esso/Exxon stock from his career, their nest egg. At some point, the husband comes to rely on a Merrill Lynch broker and instructs his wife (not typically involved in the family finances) to stick with this guy's advice when his health starts to deteriorate. Sadly for this family, the wife listened to her husband on this issue and followed the advice of the Merrill broker to put their entire Exxon stock nest egg into a 10% Charitable Remainder Unitrust, income for lives of husband and wife, and then to their 3 children, before eventually distributing remainder funds to 5 charities in approximately 50 years. This was finalized in 1996, before the 10% remainder rule came into effect - their deduction on this $840,000 CRUT was less than $10,000.

The first lesson: A Merrill Lynch stock broker, or any other stock broker or insurance salesman or financial planner, is NOT YOUR ESTATE PLANNING ATTORNEY. Even if he has a law degree or even practiced estate planning law. He (or she, too) is a salesman who is selling products or investments. Your attorney is someone who represents only YOUR interests, not the interests of the commissions to be had from selling various products to you.

In other words, beware of Merrill Lynch guy's estate planning advice.

In truth, this also applies to planned giving officers.

The take way for planned giving officers is to remember and communicate that donors need independent counsel, their own attorneys, to review various plans that have any impact on a donor's estate. Educate your donors not to rely on you or their Merrill Lynch stock broker for estate planning, especially significant parts of an estate.

To be continued.

Welcome to New Readers and Thanks for Your Feedback

New readers - thank you for joining the email update list!

And, thank you to those who have sent me feedback, which has been mostly very positive. I am trying to make this a useful program for training, info sharing, insider perspectives and your feedback is always welcome (positive or not!), and I am appreciative of everyone who sticks with it.

I am reorganizing the blog as a Wordpress site as it will help me better organize old posts, under the name The Planned Giving Blog - here is the "beta" site if you are interested: http://theplannedgivingblog.wordpress.com/ For now, I will be posting on both locations but will eventually move over the email update list to the new site.

Thanks again for keeping up with the blog and have a great weekend!

Planned Giving Nightmare CRT Case

This new legal ruling is for the die hard planned giving folk out there:

http://courts.delaware.gov/opinions/%28jt5l5vngapjgmyzobwkq5ejj%29/download.aspx?ID=126540

I haven't spent enough time on it to give readers my summary and my uptake but from my first glance, it's a real doozy of a fact pattern.

Here is a glimpse and a quote from the introduction of the opinion: A Merrill Lynch broker

"advised an elderly woman to place most of her life savings in a charitable remainder unitrust with a 10 percent annual payout, lifetime gifts to her children as successor-beneficiaries, and the remainder to go to five charities, an event expected to occur almost half a century later -- objectives that all now seem to agree and understand were unrealistic and likely unattainable. In the spirit of cross-selling, a trust company sister entity of the brokerage firm was designated trustee. Legal advice was provided by an attorney selected by the brokerage firm; the attorney never even spoke with her client, the trustor."

I think this case will be a spring board for a series of blog posts on ethics in the planned giving area!

Planned Giving Challenges - Source for CGAs in IRS Code

One of the most annoying challenges you may face as a planned giving professional is an attorney or an accountant of a donor who is requesting the source in the IRS code for charitable gift annuities.

What makes this such a difficult question (besides the fact that an entire industry uses these things - they work and are accepted!!) is that CGAs were not a one time creation under the IRS Code like charitable remainder trusts. So, we can not point to one CGA section in the Code.

Anyway, I got this question this week and I wanted to go through the roof. At first, I scanned and emailed the entire chapter on CGAs from Tax Economics of Charitable Giving (lots of sources to look up quoted by them). But, I also called a top planned giving attorney to see if he had the info handy. Sure enough, the question was common enough that he went right through the 4 primary sources in the IRS Code and Regulations for CGAs. Here they are:

Section 642(C)(5) – the definition and basic rules for CGAs

Section 501 (M) – Exempts CGAs from being treated as commercial insurance products (as long as the charitable deduction is greater than 10% of the gross gift amount)

Section 72 – This section really deals with commercial annuities but is also the source for how the “tax-free” portion of CGA payments are determined. (note: even though 501(M) says CGAs are not commercial annuities, the code has no problem using section 71 on commercial annuities to help define income issues with CGAs even though they are not supposed to be commercial annuities!)

Regulation 1.1011-2(b), example 8 – This example in the regulations has been an important source for 40 years or more for how CGAs work and how the code treats them as Bargain Sales and this in turn helps us determine the charitable deduction.

I would bookmark this page or print it. Someday you'll need it.

Planned Giving Risk Management

As I mentioned a few days ago, I had a conversation last week with Bryan Clontz, who I now consider the leading CGA risk expert in the country. If you followed my previous discussion on this topic, you should know that I've had doomsday concerns over the whole CGA business for some time.

You have to do some risk analysis on your CGA program! Especially if your entire CGA pool/reserve fund is just meeting New York's reserve requirement. According to Bryan, who confirmed my own guess-work, the New York reserve requirement is essentially the funds needed to cover the payments to the annuitants. The gravy to the charity are the funds above the reserve. (If you are not licensed in New York, and don't have such requirements, find out what it would be if you were licensed)

In other words, if you are struggling to meet New York's reserve requirement (going up again this year!), you potentially have an even bigger problem: your program might start losing money!

Maybe it's time to rethink your policies visa-vi how much you pull when a donor dies or whether you should issue annuities for related institutions or whether you should allow donors to designate the remainders of their CGAs?

Here is a link again to Bryan's site: http://www.charitablesolutionsllc.com/index.html I don't know if there is anyone else out there who can do a full fledged, professional risk analysis. Yes, he sells reinsurance - but contrary to popular planned giving thinking, reinsurance is an important option for gift annuity programs dealing with risk issues. I do my own "risk analysis" for clients but if my simplistic charts show too much red, I am sending you to Bryan.

Bryan gave me another great piece of "news" (at least news for me). Met Life very recently obtained an approved New York State reinsurance treaty.

Why is this important?

Up until now, only The Hartford was known for having the proper "treaty" in New York that would allow a charity to re-insure and not need to reserve on the re-insured portions of CGAs. Not that I don't love The Hartford, but it's always good to have price competition.

Interesting Planned Giving Marketing Research

If you haven't seen my friend Phyllis Freedman's blog, the Planned Giving Blogger, here is a link to her most recent post about a study by the Indiana U. Center on Philanthropy:

http://plannedgivingblogger.wordpress.com/2009/11/16/no-gender-differences-in-legacy-giving/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+ThePlannedGivingBlogger+%28The+Planned+Giving+Blogger%29

I highly recommend her site as it focuses on the marketing side of planned giving, arguably more important than the legal side (which I get into).

Interesting PGDC Article on Gift Restriction Law Suits

I highly recommend this piece from the Planned Giving Design Center for some background and perspective on donor restricted gifts. I heard one of the authors (Winston Smith) speak on this topic at a previous NCPG conference.

http://www.pgdc.com/pgdc/the-unraveling-donor-intent-lawsuits-and-lessons

My rough guess is that 99.999% of the time, charities that veer from their donors' intent on restricted gifts are never held accountable. Of course, it is really painful when your organization gets embroiled in one of this problems. Trust me, charities never win these things.

My advice: Fundraisers and non-profit executives need to be cognizant of these issues when accepting restricted gifts. You might actually enjoy the article, too!

New Planned Giving Option (for me, at least)

A few weeks ago, an old friend emailed me a chart comparing a charitable gift annuity versus the donor buying a single premium immediate annuity (i.e. commercial annuity) and donating the savings to your organization.

The chart was startling. It compared a $1 million CGA for a 74 year old, 6.1% ACGA rate, against the same donor buying an immediate lifetime annuity to obtain the same $61,000 annuity. It said that the donor could buy the $61,000 annuity for $435,000, leaving over $565,000 for an immediate gift to the charity.

On its face, everything seemed to make sense and in fact, it made me wonder if the ACGA rates were so low that it didn't pay for donors do CGAs anymore!!!!! (just do this deal).

This was another one of those moments when I am wondering if planned giving will be a viable career in the future for me!

My response to the friend was that it seemed legitimate but let me obtain some independent quotes to verify the numbers they were talking about.

And, today, I just happened to receive the quote on this scenario and was also speaking to Bryan Clontz (http://www.charitablesolutionsllc.com/index.html), probably the top expert in CGA risk and reinsurance. Both the independent quote and Bryan confirmed that the chart was flat-out wrong in the quote it was using.

The cost buying a $61,000 lifetime annuity for a 74 year old was not $435,000, it was more like $565,000 or more. There goes the dream gift scenario.

Couple lessons learned.

#1 - Something that is too good to be true, is really too good to be true (i.e. it's false!). Keep digging and you'll figure it out what the catch is.

#2 - Always, always get quotes from independent sources.

#3 - Despite the false quote and misleading chart, the option of having a donor purchase a commercial annuity directly from a commercial annuity provider and then the donor gifting the difference (between what the donor might have given for the CGA and the actual cost of the commercial annuity) is a REAL GIFT PLANNING OPTION!

I like to say that I have worked on almost every possible gift arrangement out there but apparently not this one!

When would this be appropriate? According to Bryan Clontz, this option is used in limited circumstances like when the donor is from a state where the charity does not want to deal with their licensing requirement (like California or New York). Maybe when reinsurance is not an option and the gift is very large.

Bryan mentioned one important point - which tipped me off that the chart I had was just wrong. He said that the swapping of a commercial annuity instead of a CGA generally gave the donor a slightly less deduction. On the chart given to me, the donor's deduction was over $100,000 greater with the commercial annuity option. That is how I figured out that whoever created the chart I was looking at had probably switched the cost of the commercial annuity with the left over charitable gift amount.

But, the good news is that there is another option out there to look at depending on the situation. I would only use this option very sparingly since it could leave the charity out in the cold if the donor loves the deal he/she is getting from the commercial annuity, so much so that he/she forgets the charitable gift part!

Here is link to Bryan Clontz's article on the Planned Giving Design Center which includes discussion of this "new" gift planning option (option #4 in the article):

http://www.pgdc.com/pgdc/charitable-gift-annuity-reinsurance-part-ii-the-top-10-creative-solutions-turbulent-times

The article is very good but if you follow the link to Bryan Clontz's website (see above) and check out his library of articles, you will find even more in-depth material on this gift option and more.

Jeffry Picower Will

Ever look over the will of a billionaire? Someone facing claims of billions of dollars by a trustee in bankruptcy. Click this link (thanks to the New York Times):

http://graphics8.nytimes.com/packages/pdf/business/20091110picowerwill.pdf

What a strange story. Jeffry Picower was facing gargantuan claims (with a pretty good defense for withdrawals older than 6 years).

He signed a new will on October 15, 2009.

He died of a heart attack in his swimming pool on October 25, 2009.

What is most fascinating to me about this will is how many employees were set to receive bequests, as long as they were still employed by Mr. Picower at the time of his death.

The whole story sounds too incredible to be true. It seems too planned. It can't be life insurance motives - doesn't make that much sense to me since he was really rich. Or, maybe life insurance proceeds from irrevocable life insurance trusts would be the only funds completely free from potential clawback?

If he did have any big life insurance policies, and I was the investigator for the insurance company, I would be looking into this! Maybe he signed his new will, cleaned up his affairs, and stopped taking his heart medication. Who is to say that the trustee wouldn't be able to go beyond the 6 year limit since Picower was as close to a co-conspirator as you get.

UPMIFA in New York

For New York charities with permanent endowments, this week might be a time to call your New York State legislators and plead for action on UPMIFA (see below older posts for more info).

I received an email yesterday looking for guidance on UPMIFA in case the New York State Legislature actually has a regular session next week. The original email came from the Commission on Independent Colleges and Universities in Albany, NY. It was pleasure see that at least one organization was on top of the issue and pushing for this law to fix lingering endowment issues from the market crash.

43 states have already enacted UPMIFA. Hard to believe New York lawmakers would ignore the plight of many of their top universities and major institutions still dealing with frozen endowments.

http://plannedgift.blogspot.com/2009/06/underwater-endowments-in-new-york-and.html

http://plannedgift.blogspot.com/2009/07/harvard-not-going-under-massachusetts.html

All's Well That Ends Well

According to the New York Times, Jeffrey Picower's will is "expected to be filed" today (Tuesday). The legal wrangling around the late Mr. Picower's estate should provide us with plenty of insight into clawbacks and how they may effect charities and others.

Here is a link to the New York Times piece:

http://dealbook.blogs.nytimes.com/2009/11/09/trustee-may-win-billions-for-investors-in-madoff/

From reading this story, it sounds All's Well That Ends Well. Madoff is off brawling with drug dealers in jail for the next 150 years and the Picower estate is already negotiating with trustee Picard (hard to believe Picower only passed away a little over two weeks ago). If the estate can successfully negotiate a settlement with Picard - which they appear likely to do, then any speculation about third party beneficiaries of Picower's philanthropy would be mute.

My hunch is that Picard's clawback lawsuits will only go after direct beneficiaries of Madoff's operations, and only for large amounts (hundreds of millions and up).

The Great Fall of Gift Annuities

Say it ain't so!

The sky might be falling (on gift annuities), or it might not be.

I think it is reasonable to say that planned giving and fundraising professionals see gift annuities as the primary planned gift we are "selling" these days and its been that way for over 10 years (regardless of the never changing fact that bequest dollars generally overwhelm all other planned gift dollars by far).

But it wasn't always the case and it probably will not be the case in the future. The question is only when will the shift take place? A change in the field away from gift annuities may be sooner than you think.

Background

Pooled income funds were the planned giving chic of the 1980s. Why? Interest rates were sky high - over 10% much of the time. A good friend of mine even wrote a manual about setting up and running pool income fund programs (I found multiple copies of it lying around the UJC offices, written on a typewriter, pages melded together after a decade or more of sitting unused on the shelves or in boxes, gathering dust).

Their downfall: interest rates eventually dropped and other vehicles offered donors higher fixed rate or annuity returns.

Charitable remainder trusts (CRTs) were chic of the 1990s. Why? In addition to offering donors fixed rate/annuity payments, capital gains avoidance coupled with financial adviser self interest in retaining investment management control over their clients' assets caused CRTs to rule the planned giving world.

Their downfall: big slowdown in capital gains avoidance (i.e. stock market crashes) coupled with the discovery of easier, cheaper, fixed income, better tax-treatment CGAs.

So CGAs rule the roost, for now. But, where are the cracks in their lead position in the planned giving world? This blog has already touched on some of the potential for underwater gift annuity programs (http://plannedgift.blogspot.com/2009/06/gift-annuity-risk.html) and other serious issues with gift annuity pools and the challenge of finding good administrative services (http://plannedgift.blogspot.com/2009/07/gift-administration-revolving-door.html). And, as a consultant working with a few national charities, I can say that CGA licensing across the country is a bear! These facts alone should probably scare off most medium and smaller charities from getting in or staying in the CGA business.

And, how can we forget the recent Warfield case (Robert Dillie ponzi scheme) from the U.S. Court of appeals, with a new specter of investment/SEC regulation hanging over the head of CGAs again. (see http://plannedgift.blogspot.com/2009/08/important-legal-ruling-impacting.html)

Why this post and why I am announcing that the heyday of CGA programs may really be over?

In a conversation with one of the most prominent planned giving attorneys in the field this morning, my eyes were further opened to additional colossal problems that CGAs are facing as a result of the Warfield case.

I personally had sent a copy of the Warfield case to this attorney early in the summer, when I was claiming that the sky was falling on CGAs. He didn't read it carefully until a few weeks ago and his reaction was what I feared.

Here is the colossal problem. The Philanthropy Protection Act (PPA) of 1995 provides exemptions from various securities regulations for all types of charitable funds/investment pools (including CGAs, of course). One caveat was that CGA funds/pools in particular would not be exempt if they were sold with commissions.

What I couldn't figure out about the Warfield case was why didn't the court just cite the PPA, note that the parties in that case were selling CGAs with commissions, and just conclude that they no longer had the exemptions of the PPA. Why the analysis of CGA marketing and other practices to determine that CGA agreements were investment contracts? And, as one critic to my posts on the topic noted - since charities sell CGAs WITHOUT commissions, wouldn't the Warfield case have no impact on the good guys anyway?

I heard the answer to my question this morning from one of the best attorney in this area. It is a very subtle point, easy to miss. The PPA exempts charitable FUNDS, pools of investments, from various SEC regulations if you follow the disclosure rules found in the PPA itself. The PPA did not address, or exempt, CGAs from being considered investment contracts. That actual decision is one that generally falls under state law jurisdiction over contracts (even though the real scary investment laws are the federal ones).

This needs repeating so that readers won't miss it: CGA contracts are not exempt by the PPA from being considered investment contracts by any court, the IRS or Congress. And, the U.S. Court of Appeals (second only to the U.S. Supreme Court) very easily determined that CGAs were investment contracts (regardless of whether they are sold with commissions or not).

The ramifications: In theory, CGA contracts need to follow all of the disclosure requirement of investments. In theory, there could be investment licensing issues for charities and/or planned giving/fundraising professionals who sell these investment products. In theory, CGAs could really be sitting ducks for disgruntled families once your CGA donors pass away - assuming they pick a sharp attorney.

And, to top it all off, the word out there in the planned giving legal universe is that the IRS is sitting on a letter ruling request addressing whether CGA programs can offer CGAs in which the contract specifies another charity (related or not) as the ultimate remainder beneficiary (common among community foundations, Jewish federations and large university/hospital systems).

Not that this narrow question of issuing CGAs for other organizations is that big - but it opens the door for some serious thought by the IRS, and maybe others in the government, as to this whole CGA business.

Honestly, CGAs have been under the radar of regulators for a long time. Except for a short time in the mid-90s with a class action price fixing suit against the ACGA that partially resulted in the PPA's enactment, gift planners have been somewhat free from serious regulations (besides annoying departments of insurance in NY, NJ, California and a few other states).

Yet, running a CGA program is harder than ever before (based on investment, administration and licensing issues). How about after the IRS finally puts some thought into this area and issues a letter ruling that may not be so favorable to current practices?

Put all of these factors together: tougher state licensing issues, concerns over investments and administration, faltering investment performance, and throw in the new investment contract issues. It is a recipe for the end of the CGA generation and on to the next chic planned gift vehicle.

I think it is just a matter of time before we start seeing another planned giving options as the favored child of the planned giving world. Maybe it will be the good old bequest - not like it ever really went out of style.

The Planned Giving Moment, Part 2

One of our blog readers remarked about the previous blog post:

"made me realize that we keep doing ______ seminars because they work: he attracts about 100 older supporters--including some known planned giving donors--each and every time he comes. It's like fishing in a barrel and one of our most reliable sources of prospects and new donors. And the way it is conducted, also educational (no hard pitch), so entirely consistent with our mission."

I think the point is not actually about which seminar (that's why I left out the name of the speaker), but finding a venue at your institution that makes sense for your organization and happens to draw a planned giving crowd. I am not sure that the actual time of day of these events but he did tell me that they were doing another one tomorrow early evening. In Manhattan, I usually stay away from night time planned giving events but this one worked for them (maybe based on location, type of institution, etc..)

Part two of this concept of seeing the "planned giving moment" was inspired by another community college event I attended last week.

Working with different community college, I had my doubts as to whether this one could really step up their planned giving efforts past what that they had already accomplished.

Here is summary of their last 5-10 years of planned giving activity of the community college: a planned giving committee of board members with a few active members; launched a gift annuity program with limited success; and got off track during the last 5 years or so with focus on a building campaign.

When the development person (who spends probably less than 10% of her time focused on planned giving) told me that she was planning their first legacy society event, I felt the need to give her a bunch of my secrets to a successful legacy event (i.e. to avoid an embarrassing non-success - a subject for an upcoming post).

Actually, with not much help from me, the fundraiser did all of the right things for a first time legacy society event with a small society (around 10 living members). She created a very classy invitation, invited board members, faculty, and long term consistent givers. Picked a nice location (historic building on campus) and a good time for their location (2 to 4 pm) - easier without a full lunch - just coffee/tea and a few snacks.

To their credit, they also picked a beloved, long time professor (also a new member of the society) as a speaker on a topic that had nothing to do with planned giving or fundraising - just an interesting speaker on a topic of interest related to her teaching at the campus.

And, they "hit it on the nail" (i.e. they got everything right about the event). About 30 attendees (just right for the space), many knew each other for many years, really friendly, fun atmosphere, lots of good rah rah stuff from the President. Everyone got an award (for being a member of the society or long term giving).

The speaker also happened to be one of the funniest people speakers I have ever seen and was a walking advertisement for the campus.

Lastly, even though the president's campus update and the speech were the principal parts of the event, the planned giving message was broadcasted very clearly throughout and people really understood the importance of including the college in their estate plans.

It was definitely an event which those who attended will want to come back for more and the real start of their planned giving program.

And, amazingly, they had immediate "results." I hate to focus on immediate results because there are so many intangibles that are important about legacy society events (if done well). But, they were able to report an unexpected $5,000 check on the spot, a seven figure bequest revealed, and a few non-society attendees asking for meetings with development staff about becoming members.

And, it hit me again, the "planned giving" moment. This community college had a significant group of older supporters, professors, neighbors, etc.. who were ripe for this message and would come back regularly (if invited) and tell their friends. It has probably been there for many years but this was the first time they were taking steps past creating a committee and placing a few advertisements.

Find your "sweet spot" when working on a planned giving plan. Ask yourself about the relationships older individuals have with your organization. Figure out where you org serves an older crowd. Or, even devise a plan to get older individuals involved with your institution of it makes sense (mission-wise).

Years ago, I told a cutting edge outreach/educational organization in Manhattan to consider offering classes during the day (morning or mid-day) to see if they can develop a constituency of older attendees. The typical lectures they offered were of interest to retirees and seniors, too, so why not have a special program serving the elders in their community? They wouldn't listen to me - it didn't have enough ROI and they claimed that they needed to focus on younger adults. Too bad for that organization because they had a "product" of interest that they could easily have brought to an older crowd - all well within their mission - and start a planned giving program.

And, they would have provided a great service to the individuals attending the lectures for the planned giving prospects.

The Planned Giving Moment

Not every organization has an obvious or natural planned giving constituency. We see it all the time in consulting. That is not to say “forget about planned giving.” Before making a conclusion as to your planned giving viability or not, you have to literally look around to see if there are places and segments within the framework of your organization that connect to potential planned giving segments of supporters and friends.

For example, while visiting an upstate New York, community college and after having discussed the various ways this campus could somehow infuse some planned giving into their fundraising program (not an easy task on a tight budget, tiny staff, pretty small and relatively young graduate base), our last stop was a special dining room run by their culinary arts program (just part of the campus tour).

As we approached the dining room, I noticed four planned giving prospects leaving the dining room for the elevator (i.e...four senior ladies who happened to look like they were really enjoying themselves). And, then we entered the dining room – passing very tastefully designed windows where spectators could watch some of the cooking and baking of the students.

Sure enough, the room was full of planned giving prospects enjoying their tasty meals in a great atmosphere (the dining room had been the dining room from a grand old hotel that was given to the school and now tastefully decorated and hanging various art works on loan on the walls). The staff told me that getting reservations for the once or twice a week lunch times was extremely difficult – it was a first call, first serve reservation system and it booked up almost immediately every week. It turned out that this dining room was a major sensation in the area for people of the right age, who get a wonderful dose of good feelings at the campus on a regular basis, and probably feel like the campus is a second home.

I turned to the chief fundraiser who I had been meeting with and told her that this is where her planned giving events needed to be and these are the people she needs to invite (in addition to older graduates, longtime donors, board, etc…).

This was my planning giving moment: when I saw clearly that this college had a special relationship and platform for connecting with their mostly older local residents.

You never know – you have literally look around at the happenings of your organization. You may have a natural planned giving group right in front of you.

At my first full-time job in planned giving at the Anti-Defamation League, I had a similar planned giving moment when attending a New York regional lunch/current affairs update – just another run of the mill ADL guest speaker talking about civil rights or whatever. For reasons unbeknownst to the planned giving staff, they started scheduling these for lunch (not the usual 8 am slot for busy execs). I walked in the door to the first one and lo and behold, a room full not only of planned giving prospects, but many of our actual planned giving donors in the room.

It turns out that the general fundraising staff lost patience pretty quickly with these “cultivation” events – all they saw was rooms full of older people, many taking home sandwiches but no new major gift donors.

My thought at the time: Excuse me short term thinkers – where do you think your 100+ new bequests a year and $4-$5 million+ in actual bequest dollars annually come from?

They discontinued these luncheon update events pretty quickly from what I remember. What a shame. For virtually no cost, and little staff effort, they could fill a room with up to 100 older residents of New York, mostly from Manhattan itself, on a monthly basis.

Were these people ever going to be major gift donors, if they weren’t already so? No.

Were they going to become annual donors? Maybe yes, maybe no.

But, were they candidates for 6 and 7 figure bequests? Definitely.

Beware of Dilettante Attorneys

dilettante - noun: 1. An amateur or dabbler; especially, one who follows an art or a branch of knowledge sporadically, superficially, or for amusement only.

I just couldn't resist a post on one of the more ludicrous pieces of legal advice I heard about last week.

Art/tangible property gift - will be displayed (for three years, no less) but since it wasn't a museum and the piece had nothing to do with the institution, there were concerns whether this could qualify for related use and provide the donor with a full fair market value deduction (see other posts under Art and Tangible Property).

Initially, when this came up, I recommended - as I typically do for these types of situations - to get an opinion from outside legal counsel. Somehow, they ended up getting an opinion from one of the in-house lawyers from one of the planned giving marketing providers out there.

What was the opinion? The "lawyer" told this institution that since they planned to put the art work on the walls (ie..display it), it should be exempt as a furnishing.

OK, here is the reg section on related use which does exempt furnishings from this rule:

Reg. 1.170A-4(b)(3)(i)...If furnishings contributed to a charitable organization are used by it in its offices and buildings in the course of carrying out its functions, the use of the property is not an unrelated use.

I am not going to even bother to research if we can interpret this sentence in the IRS regulations to mean this - it's a waste of time because there is no way in ... that you can classify a work of art as a furnishing by virtue of hanging it on the wall (and rendering the entire related use question mute).

So here is the lesson. There are a lot of dilettante attorneys in the planned giving universe (some of whom have no clue what they are really doing). I am talking about people who have legal degrees but may never have practiced law, let alone anything remotely associated with estate planning or gift planning. They could be financial salesmen, consultants, in-house experts, etc... And, they could actually be providing very useful information and guidance.

But, when it comes down to a real legal opinion or drafting of a real legal document, the litmus test is whether this attorney is in the practice of law and has his/her malpractice insurance to back-up his/her work.

Using a lawyer, in the actual practice of law, is an insurance policy in case anything goes wrong. I used to draft all CRTs for the first in-house planned giving job I had. Then, as a legal consultant to Jewish federations across the country, I witnessed some very disastrous situations and the question always came down to: who drafted the trust? That is when I realized that trust documents and other truly legal things are best left to attorneys in the practice of law.

So, I am admitting - at least for now - you should put me in that category too since I don't currently practice law in a law firm. Pretty hard for me to write this but it has to be said. Be careful about your sources of information. Guys like me provide very useful educational information and we might even walk practicing attorneys through creating various gift plans. But, at the end of the day, I don't have the level of legal responsibility a lawyer in a law firm has.

The trick is to know when you need an actual practicing attorney and when you can rely on us "consultants." And, the other trick is to figure out when the advice is completely bogus. If it is too good to be true...

Madoff, Clawbacks and Charities

For those in the philanthropic world, seeing stories in the press about the bankruptcy trustee in the Madoff mess and his attempts to recover assets has to make us wonder what will be with charities potentially involved in clawback suits. The Forward and Bloomberg have already started to mention this issue in recent articles (see below for links).

What about charities that withdrew funds in the normal course of business and happened to exceed their initial investment in Madoff? Or, what about non-profits that divested their Madoff or Madoff feeder fund investments well before the discovery of the massive fraud? Or, what about charitable beneficiaries of Jeffry Picower's Foundation during the last few years? (Note: Jeffry Picower passed away yesterday, another sad chapter in Madoff tragedy.)

Thanks to the law firm of Drinker Biddle, I now have some idea how claw back suits work (see below link to their article on the topic). Here is a summary of the rules based on the Drinker Biddle memo:

1. Charities have to be treated like any investor - there is no point in discussing the ethics of clawbacks against charities. The trustee has an obligation to recover funds for those defrauded, starting with the biggest and closest who benefited. Where is the logic or ethics in agreeing to allow a charity to benefit at the cost of other defrauded investors?

2. All withdrawals made within 90 days of a bankruptcy petition are subject to full recovery by the trustee, whether or not the money taken was from "principal" or "earnings." Insiders under some circumstances may be required to return any withdrawals within a year.

3. Next comes withdrawals of "fictitious" profits made within 6 years of the filing (for Madoff, the date is 12/16/2008). Federal bankruptcy law actually proscribes 2 years but New York fraudulent conveyance law extends the clawback period to 6 years. Not being an expert in this area, I am guessing that attorneys may fight to get out of applying New York's law on jurisdictional grounds - possibly a way to save clients some money but for sure a serious legal battle.

4. How do we define "fictitious" profits? Very simple. Any penny withdrawn in excess of your original investment is fictitious profit. From reading the Drinker Biddle memo, it seems clear that if it can be established that you had already withdrawn your full investment in Madoff prior to December 16, 2002, then you would be obligated to return every penny withdrawn during the period of December 16, 2002 to December 16, 2008. That is pretty frightening for a place like Hadassah which all but admitted that they had long recovered their initial investments.

5. If you never reached the fictitious profit level, and you didn't withdraw any funds within 90 days (assuming you are not an insider), you should not have any clawback concerns. If you received a letter from Picard demanding return of funds, it would be time to seek legal counsel as soon as possible.

6. One last point for those who knew or should have known of the fraud taking place - the trustee in theory can seek to recover for even non-fictitious principal withdrawals in these cases. These will be a totally different kind of legal case and probably very weak if the trustee can't place you as a co-conspirator. If the SEC and the rest of the world didn't notice, how can the government claim that a non-conspirator should have known? My guess is that the trustee will not pursue these but for clear insiders who most likely knew something was wrong (ie..family).

With the sad passing of Jeffrey Picower, a huge philanthropist, I am wondering about indirect charitable beneficiaries of the Madoff scheme. Bloomberg.com reported that Picower made a $50 million donation in 2002 to fund a brain-research center at MIT. Was it early in 2002 or after December 16? Can these funds somehow be traced to Madoff profits?

What about charities that had invested with Madoff indirectly (through one of the "feeder" funds)? And, what if they had wisely chosen to send their investments to other managers and taking along fictitious profits, too?

In the end, Picard the trustee will have to pick his battles carefully based on size and likelihood of success. Big targets, charities or not, watch out.


http://www.theworldlawgroup.com/docs%5CUnited%20States-Clawbacks%20in%20the%20Aftermath%20of%20Madoff.pdf

http://www.forward.com/articles/116262/

http://www.forward.com/articles/112466/

http://www.bloomberg.com/apps/news?pid=20601103&sid=azCKA1yuc6sg

Schervish Still Touting Ridiculous Wealth Transfer Claims

If you haven't seen the latest Wealth Transfer lunacy from Paul Schervish, here is an article in Forbes about how Schervish and his partner still claim that some trillion something or other will be changing hands over the next 20+ years:

http://www.forbes.com/2009/10/02/estate-tax-bill-gates-boston-college-personal-finance-bc.html?partner=artctrlinboxmain

I am bit negative on the subject for two reasons: 1. The numbers for charities are already impossible - never going to happen (I'll have to do the math again soon); and 2. Especially after I just wrote a 16 page paper for the upcoming NCPG (now PPP) conference presentation that two of my colleagues at Changing Our World are presenting this week looking at various demographic projections (life expectancies, changing family structures, impact of this past year's drop in retirement savings, etc..). Looking at the big picture future for America in general and philanthropy in particular is pretty sobering.

I am working on getting the paper linked to this blog as a PDF (or you can download it if you attending NCPG).

Planned Giving Made Simple for Smaller Institutions

One of the readers of this blog reminded me today of what I considered the best small charity planned giving effort story. It is simple and worth thinking about if you are trying to get a planned giving program going at a smaller place.

Early in my consulting work for United Jewish Communities, I visited with a group of smaller Jewish charities in the Catskills area for an open discussion about starting planned giving programs.

I was the guest speaker and didn't expect to be impressed by the planned giving efforts they were discussing.

But, one of the participants was from a synagogue that had made a consistent effort and to my surprise, it dawned on me how successful they were.

What was this great program? It was a simple "Tree of Life" effort that focused on estate commitments. What is so special about that?

Well, their board went through the pains of developing a plan to seek deferred commitments. They gave those who made bequest/estate plan commitments significant recognition in their lobby (on the brass leaves to the tree). They created an annual event with promotion within their community celebrating the new members to their Tree of Life campaign.

Bottom line: they created an ongoing program to seek these types of commitments (nothing complex) that worked year in and year out. Their volunteer accountants had some idea of the potential sizes of many of the gifts so their board had an idea of what the pipeline might be. They added charitable bequest planning to the culture and activities of the institution and their participation rate was very high.

That is all you need. Almost every synagogue I have seen has a Tree of Life but they never have anything to do with encouraging bequest commitments (except this one, of course). Sadly, I have watched as older members of various synagogues pass away in my community and never hear about bequests.

It takes more foresight than you think for a small, older institution make a long term commitment to encouraging estate plan commitments. That one in the Catskills told me that they had about half a million in expectancies and an unknown dollar amount, probably greater than the known amounts. They basically ensured their future by giving up a bit of today.

It is just a matter of getting it on the agenda and sticking to it.

Endowments and Naming Opps Written in Stone?

A really good question came to me through a client situation. It involved a big naming opportunity on an existing building. The donor was solicited for close to a 7 figure gift, and he was ready to make the commitment. Problem came up - the board started having second thoughts about permanently naming this building for the price asked (make sure your board officially approves your naming opps list BEFORE making the asks). My colleague's job was to help save the gift - if you go back to the donor, after the ask was already done, what do think he is going to do? Not a good scenario.

My role was to finesse some language that could give the board the confidence that they could change the name on this building at some point in the future without disrupting the donor and the gift.

The answer came to me pretty quickly. Variance Power. This is the important clause that community foundations in particular use in their permanent gift agreements. It gives the non-profit the ability to change purposes of a fund or other donor agreement should circumstances change. Otherwise, technically you might be required to seek attorney general approval and/or a Cy Pres action in court to make the change. Of course, if a donor is still alive, it always makes sense to ask the donor to consent to a change.

Here the are samples I came up with (based on old samples I had in my old files from my days working with Jewish Federations):

Variance Provision (long version)

While it is absolute aim and obligation of the Board of XYZ to fulfill the intentions of all written pledges and designated gifts to the ABC campaign, in the event of changed conditions, laws or other circumstances in the future, whereby any gift’s purpose may no longer exist or may be impossible to continue or perform, the Board of XYZ requires that this Variance Provision be included in every gift agreement. This provision permits the Board of Trustees to vary, when necessary, from the donor’s original stated purpose or naming opportunity to a similar new purpose or naming opportunity. Any new purpose or naming opportunity shall be as closely aligned to the donor’s original intent as possible. The Board of XYZ will notify any donors and/or surviving family members of the donor if this provision is ever exercised.

Shortened Version for Pledge Agreements

All pledges and commitments to the campaign are subject to the Variance Policy of the Board of Directors. This policy allows the Board to vary, when required to due to changed circumstances, from the original stated purpose from a gift or pledge agreement to one that is as closely aligned to the donor’s original intent as possible.

Shortest Version for Pledge Agreements

Should the purposes and/or intent of this pledge be impossible or impractical to perform/maintain, the Board of XYZ reserves the power to vary the use or naming opportunity created by this pledge to one as closely aligned to the donor’s original intent as possible.

After going through this exercise, it dawned on me that use of this type of clause in all gift agreements, especially ones that involve permanent naming opportunities, is a really good idea.

Message To Readers

Thank you for reading my blog! As more people visit and sign up for email updates, the more inspired I get to stick with it (and I have fun anyway). The posts on this site are a combination of planned giving related news, training and background pieces, and commentary on various planned giving issues. And, I promise never to over blog!

This effort is still a work in progress but my goals are coming together. I have trained, advised and coached easily over 200 fundraisers in planned giving over the years. Goal number one: get as many of my previous trainees to be linked in (thank you those who have already signed up!). Ultimately, I hope to somehow make this an ongoing training module and a way to stay connected to my planned giving friends. Goal number two: to those who don't know me personally, my approach to guiding people since law school has always been to share info and/or give it away free (within reasonable limits, of course). So take advantage of it, read the blog, submit questions.

Lastly, you will see that my articles are based on pretty broad experiences throughout the non-profit world. But, there is also an approach behind the musings. I learned it not in law school, but rather from several years of in-depth Talmud study (not intended of course to be applied for non-religious purposes but very useful for lawyers nevertheless).

I can still remember the phone call I received from my first legal opponent - a middle aged BMV driving couch potato lawyer. He had just read my brief and was somewhat stunned about what I wrote and he called to ask me something like "what the heck is this?" Well, he found out the answer when the judge told him to sit down and be quiet and proceeded to read directly from my brief (a sign I quickly learned that meant we win) and granted our client our motion for summary judgement. The secret I learned from my Talmudic training is pretty simple - keep digging, keep questioning, keep trying to understand how legal issues work, and understand the concepts behind the rules. I have been talking with the best attorneys in the planned giving area for years and I can confidently say that they all have this in common - they make sure to understand how particular laws and rules came into being and what the drafters were trying to accomplish; they understand the concepts behinds the laws. No good attorney memorizes rules - they understand the rules to the point where they can apply them.

So, after all of these years in planned giving, I am still trying to better understand why these gifts work the way they do. And, while you (the readers) don't necessarily need to become tax experts, the more you understand the various legal issues involved in planned giving, the more confident you will feel when speaking with donors, the more planned gifts you will be able to close. All of us, myself included, need to be able to tell a prospect that we have to check with others before answering a question. But, you may never get to that point if you avoid the conversation or can't confidently lead the direction of the conversation towards a potential planned gift.

So, there you have it. Please stick with this site - I promise to get better organized (I plan to compile relevant posts into a book on planned giving some day). And, forward posts around!

Second Thoughts on Forbes Article

Like most articles in the mainstream press about planned giving, attempts to create a catchy/interesting story end up doing a real chop job on the truth.

The Forbes article is no different.

http://www.forbes.com/2009/09/29/charitable-gift-annuity-crescendo-personal-finance-marketing.html

Basically, the accusation is that by using canned planned donor stories, you are guilty of making a "Dubious Annuity Pitch" or "Canned come-ons cite yields unavailable to most buyers."

Come on writers!!! The only crime or misdeed involved is shoddy marketing!!! It doesn't take a genius to figure out that real stories, with pictures of real donors, will go a lot further than some obviously canned stuff (spot-table a mile away).

But, as this article is in a major publication, we have to give it some due and think about the issue it is hitting on (however skewed and misapplied it is).

It actually reminds me about the Wall Street Journal article this past spring talking about how CGA programs are going under and how it was so bad for donors (when in reality, it was just one CGA program going under and the donors should have known better than to do a CGA with that so-called organization).

Why? That notorious Wall Street Journal article actually did hint to a larger problem of potentially faltering CGA programs due to investment losses (which seems to have turned around).

The Forbes article also hits on a topic often discussed in this blog: fodder for plaintiffs' attorneys. A good friend and attorney made this point to me as I complained about the article and on second thought, I agree.

The chances of a charity being sued over a CGA arrangement are low, very low. But, they aren't so low that it will never happen. Any marketing that your charity engages in while promoting CGA programs in particular can come back to haunt you. Attorneys representing disgruntled donors or family members will look at any means to challenge a gift, especially your own marketing efforts. Fraud in the inducement is pretty powerful. And, even if you can fight off that particular legal challenge, the attorney has just biased the judge or jury against your organization for being sleazy.

I am not trying to be overly nuts on this issue - go ahead and market planned gifts. The point is that as your institution proceeds into the public realm with various promotional materials, it is a good idea to think about whether you are stepping over boundaries that could later haunt you. I tell clients to stay away from using canned donor stories. I also tell anyone willing to listen to avoid use of investment terminology when promoting CGAs.

Have a great weekend and thanks for sticking with my blog!! (please forward stories to friends!)

Interesting Forbes Article Attacking Typical CGA Marketing

This story is making the rounds in the planned giving world:


http://www.forbes.com/2009/09/29/charitable-gift-annuity-crescendo-personal-finance-marketing.html

In short, Forbes has taken up the cause of attacking generic planned giving marketing (using fake donor stories) - particularly focusing on canned Crescendo web pieces. They have a point. What they described is deceptive but I am not sure it so deceptive to actually have any legal or even ethical significance.

I just wonder why they picked this topic. There are much greater issues in CGA marketing like their potential classification as investment products in litigation or by the SEC.

And, it seems like they are unfairly picking on Crescendo, a very honest and ethical company as far as I know.

FASB Liability vs. Required Reserves

The issue of FASB Liability and Required Reserves for CGA programs is an advanced one but I encourage newcomers to the field to read this post anyway (I will try to explain it well and this will give you solid background info that will help you further understand gift annuity programs).

The question hit me last week. One of my client's requested a FASB liability report for their auditors and something struck me as wrong in the report given by the investment/administration provider.

Firstly, what is FASB and what is this liability report?

FASB stands for Financial Accounting Standards Board. Basically, auditors and finance/accounting staff of all types of entities try to follow their standards (they are not actually legal standards - a discussion for another post - but we try to play nice with them anyway).

The FASB liability report? In regards to charitable gift annuities, FASB has standards for institutions to determine the value of the "liability" of each gift annuity contract. In other words, the estimated amount needed to pay the donors for the rest of their life expectancies.

This needs explanation because it is a crucial point in understanding gift annuities and the various calculations involved (charitable deduction, booking value, reserves, etc...).

Ask yourself (out loud and slowly) this question: How much money do I need today to pay this annuitant his/her gift annuity for the rest of his/her life (assuming the money is invested and growing at a fixed rate)? We know how much has to be paid: the fixed annuity payment. We know for how long: the rest of his/her life expectancy. The only question is how much investment growth will their be?

Let's make this very practical. 72-year-old donates $10,000 today (Sept. 2009) for a one-life, immediate payment gift annuity of 5.9% (according to the ACGA recommended rate) for his/her life. This imaginary donor will be entitled to receive $590 a year for the rest his/her life - 14.5 years according to the life expectancy table. Without any investment return in the picture, we will pay this donor $8,555. (Don't get side tracked with questions like what if this person gets sick or alternatively eats lots of yogurt - all the accountants want is a projection of what the cost may be TODAY of this gift - who knows what will really happen)

Ask yourself this next question: Do I really need the full $8,555 in the bank to pay this annuity over 14.5 years? Well, if we can assume an investment rate of return - a fixed rate, of course, because anything else would be too difficult to deal with - we really don't need the full $8,555 in our investment account.

If we assume a fixed rate of investment return of, let's say, 3.4%, you would only need $5,671.60 in the bank today (earning 3.4% per year) to pay our annuitant his $8,555 over the next 14 years.

I chose 3.4% because it happens to be the current "Discount Rate" of the month (otherwise known as the Applicable Federal Rate - AFR - issued monthly which charities use for these calculations/assumptions). So, $5,671.60 is the actual FASB liability of this gift, as of today.

As an aside, your planned giving software simply subtracts the liability from the gross gift amount to give you the charitable deduction. In other words, the charitable deduction is the gross gift amount minus the money needed to cover the payments to the donor (based on the assumptions we discussed). Additionally, you should note that the lower the Discount Rate, the more money you need to cover the payments since your you are, in theory, earning less on the investments needed to pay the annuitant.

Now that we have these concepts done, back to my issue.

My question on the FASB liability report, that came from standard planned giving administration software, was this: the report showed that it used the AFR/Discount Rate/assumed rate of investment return of the month that each gift was originally created (not the current rate of assumed returns).

This confused me. I had assumed that a FASB liability report would want to show us what the liability is TODAY (using today's life expectancies and using today's investment assumptions). It turns out, FASB itself apparently lets auditors choose whether they want to calculate the total liability using the original AFRs of the gift annuities or the current AFR, at least this what people tell me.

Problem #1: the liability will be very different between the two "options." Today's rates are very low - 3.4% to be precise. But many gifts in the pools I work with were created when the AFRs were 6% or higher. My thought is this: if you want to make a projection into the future, knowing what we all now know (but didn't dream of a few years ago), I would say the lower expectation of 3.4% makes sense. And, the lower expectation would mean a greater amount of money is needed in the bank to ensure that you have the funds needed to make these payments.

Problem #2: I had assumed that the standard required reserve (for New York in particular) was the FASB liability plus a percentage above it as a further cushion required by New York. Could it be true that we have a choice on how we calculate the FASB liability when we do our New York annual report?

A quick call to the New York State Department of Insurance's head actuary solved this quandary pretty quickly. The answer to the question of whether New York requires you to calculate your reserve by using either the AFR of the original gift date or the current AFR was....NEITHER.

New York State actually has their own assumed rate of return depending on the year of the gift. It has ranged between 5.25% and 5.5% for the past few years. Why? The actuary told me the logic: they are assuming that you (the charity) are purchasing long-term treasury type assets (20 year treasuries), therefore the assumed rate of return should really be based on the typical type of long term bonds you should have purchased in the year of the gift.

This actually made a lot sense a few years ago when New York basically required that the required reserves be invested strictly in things like treasuries. The problem is this: the New York legislature actually changed the investment requirements to a prudent investor standard a few years ago. Now, it is up to the investment manager to invest as they feel appropriate. (for a time in 2008 and 2009, 20 year treasuries dropped below 4% - not great for CGAs - but they are now back over 4% since April and do make sense). See my post on CGA risk for further discussions on investments and risks to CGA programs: http://plannedgift.blogspot.com/2009/06/gift-annuity-risk.html

If New York didn't require an additional percentage of reserves, I would be saying that charities following New York's reserve requirements were under-reserved! They are requiring charities to use relatively high assumed rates of return for their reserve requirements (and artificially lowering the amounts of funds needed to cover the payments - assuming more realistic returns).

Back to FASB and to bring this discussion to a close. Apparently the accounting board doesn't really have an opinion on whether one should base their liability calculations on the assumed rates of investment returns when the CGAs were created or on current rates of return. My thought is that since we use the new life expectancy of the donor, why not use the new investment return assumptions (seems more realistic to me).

In any case, I have been providing accountants and auditors with various reports and calculations for years upon years, and I have no memory of any of them ever coming back to me with a question. In other words, I don't believe the auditors really understand this stuff so they just take what we give them and move on. And, maybe FASB has an opinion on the topic but no one seems to know it.

Comments on ponzi scheming CGA promoter case

I am somewhat surprised that the recent federal appeals court running that I reported on about Robert Dillie (http://plannedgift.blogspot.com/2009/08/important-legal-ruling-impacting.html) hasn't been discussed (besides the republishing of my post on OnPhilanthropy.com and the Planned Giving Design Center).

One of the comments I heard from a colleague was that "it was an old case." Of course, I wanted to scream.

True, the actual facts of the case were old news but the facts have nothing to do with the problems that might be caused by the ruling (published just this summer). It is the ruling that matters; the level of the court (just below the Supreme Court) and their approach to analyzing whether gift annuities are investments or not. It is not even whether the court was correct in its approach or not(it may very well have been wrong).

You have to put yourself into the mind of a plaintiff's attorney. I should know - I was one and I spent several years making people feel miserable (especially older attorneys resting on their laurels). I didn't always need the law or logic on my side - all I needed was an inch. Something to give us standing to start the case, negotiations, etc.. Admittedly, we bluffed our way into many situations. Sometimes we "won" on air - sometimes we got crushed, but we always caused trouble for someone.

One thing that I have learned since joining the non-profit world full time in 1998, charities sit in an extremely weak legal position. Law suits (or even threats of law suits) never go well for them - even with top pro-bono counsel. I can't tell you how many litigation situations I have been involved with where the charity had the better case but opted to settle or not pursue a rightful claim. Maybe it was the potential public relations fallout, maybe charitable executives who didn't want the entanglement, maybe it was fear over costs or staff time.

No matter the reason, charities are sitting ducks in general when faced with potential litigation. Here comes a U.S. Court of Appeals which flat out says that most of the standard gift annuity marketing is our proof that gift annuities are investment products. It is just nice and dry firewood for attorneys of unhappy CGA donors, or worse yet, unhappy children or other beneficiaries of CGA donors.

Commissions for "selling" planned gifts?

A reader of this blog submitted a question to me looking for "examples of compensation agreements that are based on other factors besides the amounts contributed, but still reward success and provide incentives for competence and performance?" In other words, he is looking for one of the shangri la's of planned giving - gazillions of motivated and aggressive professional financial salesmen "selling" planned gifts for your organization (albeit with commissions).

The questioner also mentioned that he represented a non profit that issued charitable gift annuities ("CGA") and paid small commissions based on the amounts contributed. It wasn't clear if his question only involved CGAs or all types of fundraising (for this post - I am focusing only on CGAs and planned gifts).

The email was missing another important fact, which we can make an educated guess at: Who are the "salesmen" of CGAs for the non-profit? If the "salesmen" are in-house fundraisers, the answer could be a bonus system (regardless of the general ethical problems inherent with any bonus system in fundraising). We are forced to assume that the "salesmen" are non-employees - most likely financial advisors.

Instead of vilifying the questioner or the org he represents (which many in the planned giving world might do), let's think about it.

Firstly, if you read my pieces on Robert Dillie - the Ponzi schemer CGA issuer (click here http://plannedgift.blogspot.com/search/label/ponzi%20schemes), one thing you should have noticed is that this guy (through his Mid-America Foundation) issued over $55 million in CGAs to over 400 donors over 5 years. Few charities can come anywhere near that production - and the gifts were to a new foundation with no history of anything!

On the flip side, the Pension Protection Act (PPA) of 2005 very specifically states that for CGAs issuers to be free from SEC regulations, CGAs can not be issued with commissions to salesmen (The practical legal implications of the PPA will be the topic of an upcoming blog post. My wonder while reading the Dillie case was why didn't the court just look at the PPA to determine that the CGAs in question - all sold with commissions - weren't afforded PPA exemptions and were automatically considered investment products? Why the whole analysis in the case when the answer was in a statute?)

Ok, I have to admit, as a consultant, it has crossed my mind that should I ever find myself on my own (I work for a large fundraising consulting firm and previous worked in-house in planned giving after leaving law practice), is there any way I could be compensated based on the gifts closed? This is not about greed on my part, more out of a practical consideration: many charities have actually approached me and wondered if I could help them (but they couldn't afford to pay out of existing cash flow). In other words, charities looking for a "contingency fee agreement" in lieu of standard planned giving consulting fees.

Putting aside the PPA (which basically forbids commissions with CGAs and possibly with other planned giving vehicles), is there any way for someone to get paid for closing planned gifts for an institution on some sort of contingency?

When it comes to planned gifts (CGAs and CRTS in particular), there are options outside of "dreaded" commissions.

CGAs: There are two ways a third party can be paid for helping an organization receive CGAs.

1. Administrative/investment management fees - if a third party provides administrative and/or investment management services for a CGA program, it is perfectly reasonable for the issuing charity to pay a fee out of the CGA pool for those services. Mind you, there needs to be legitimate "services" provided (not just uncovering CGA prospects) and fees for administrative services can not be based on the size of the gifts (rather the fee should be commensurate with the services provided). Not being an expert in SEC regs or investment law, I would throw out a word of caution to those non-investment managers trying to get a piece of the annual basis point fees traditionally taken by investment firms. What I have seen is third party administrators providing real administrative services and charging flat fees per annuities. I have also seen licensed stock brokers providing "free" planned giving consulting services in exchange for investment management fees they will receive when funds come in that the broker manages. As an aside, this is one of the knocks I have on those investment providers that claim to offer free planned giving consulting services: they have no interest in future bequests (no investment management fees from future bequests) but that is where 80% or more of planned giving revenue lies.

2. Reinsurance - If you read my earlier post about CGA risk (http://plannedgift.blogspot.com/2009/06/gift-annuity-risk.html ), you should understand that I loathe the idea of taking any principal out of a CGA pool because I believe charities generally don't understand the long term investment risks and they need to have as much cushion as possible in their CGA pools. That being said, I have become much more attuned to reinsurance. I actually think it should work for most charities, especially smaller and less sophisticated ones. And, reinsurance does open the possibility for commissions on the purchase of the reinsurance contract to a salesman. What the Hartford told me (and they are the only ones that I have found that handle New York CGA reinsurance properly) was that a "consultant" who has a valid life insurance license could receive a commission from the sale of the reinsurance contract. They said there was a percentage range (I can't remember the percentages), not so high, that the charity would see tacked on top of Hartford's own standard sales commission. In the case of reinsurance, at least the long term risk has been mitigated so giving a piece of the pie to a "salesman" isn't that bad.

CRTs: As for charitable remainder trusts ("CRT"), investment management fees are much easier to arrange. CRTs are stand alone vehicles so your charity can choose to let the investment advisor who "sold" the idea to the donor of a CRT manage the investments of the CRT. A word of caution - I have seen many cases where the donor's investment manager kept control over the newly created CRT assets and botched it royally. So again, your investment manager can still receive fees for managing a CRT, whether the charity is trustee or someone else.

Outside of investment management fees, trusteeship is the last refuge for potential fees for a "salesman." Individuals can be appointed trustee of a CRT and most states allow for a trustee to receive a fee for his or her services (usually subject to state law limitations). What if your "salesman" is appointed trustee? Depending on the size of the CRT and state law, that could be a great deal of annual "trailing commissions" for the salesman/trustee.

But the challenges of being CRT trustee are several-fold: 1. A trustee has a fiduciary duty to both the charitable remaindermen and the income beneficiaries - a legal standard of care/responsibility which sane individuals usually would want to avoid except for close relatives; 2. Managing the administration (payouts, tax returns, etc...) for CRTs are not everyday tasks, even for accountants and other financial people, and typically those not specializing in them mess them up miserably (with potential personal liability due to problem #1 in this paragraph); and 3. Overseeing the investment of CRTs, which may sound easy for financial salesmen, is in actuality not so easy and can also land the trustee a big fat law suit. Of course, as trustee, you can do what most charities do when they trustee CRTs - have a bank or trust company do all of the lifting (admin. and investing) for their fees and you sit back and take your fee - but as trustee, you are still legally responsible at the end of the day if there are problems.

In truth, the idea of an individual "salesman" serving as a CRT trustee is plain old nuts - not a good idea unless you are a bank or trust company or a charity with financial expertize in-house.

Back to the questioner's original point - how about rewarding your "salesmen" for the amounts they can bring in. I have no answer because I don't think it works (outside of the investment management fees, administrative fees or reinsurance commissions). Unfortunately for the charitable world, they are missing out on the financial industry's sales-force - which Robert Dillie tapped into and made a mint(and then went to jail). On that thought, maybe it's better to stay away from the whole "financial incentive" push that would come along with a "professional" sales-force.

If you realize that Robert Dillie received $55 million in "gifts" to his fraudulent foundation, you have to wonder how this happened. My guess: hundreds of financial salesmen - with commission incentives in hand - unknowingly pushed a bogus foundation on their clients. It makes me wonder if those salesmen had any duty to their clients to do any due diligence before recommending the "investment"/"gift" to the Mid-America Foundation? Charities are obligated to provide whoever asks a copy of their most recent 990 tax return - so finding out information about the foundation should not have been very difficult. Did these salesmen think to double-check the solvency of the "company" behind the "product" they were selling? If I were someone who lost my gift annuity in the Dillie fraud, I would be looking closely at those salesmen who probably did no due diligence before pushing a fraud on their clients. Of course, the Mid-American Foundation was probably the only one offering commissions to outside sellers of their gift annuities.

The point I am making from the previous paragraph is this: despite the "good" (i.e. dollars) a professional sales-force could do for generating more CGAs and other planned gifts, the "bad" (i.e. unethical practices that lead to law suits) far outweighs the idea. Planned gifts are already ripe for law suits from disgruntled donors - and that is where you have a generally highly ethical "sales-force" in your in-house fundraisers. I can only imagine the problems caused by having the "snake-oil" insurance sales-guy world out there hawking your planned gifts.

Sorry questioner - the commission idea is not a good one for planned giving. There is no magic answer for selling planned gifts with incentives for financial sales professionals.