Gift planning lawyers are starving for case law because people don't seem to take our warnings very seriously. How many times have you heard lawyers at planned giving conferences warn about how we are promoting charitable gift annuities? About avoiding investment language, how we should be emphasizing the charitable gift in the gift annuity, how we really shouldn't mix up CGAs with anything related to securities (and their SEC regulations).
And, how often do we see gift annuity advertisements extolling "attractive rates." Or, how about "a gift that offers lifetime income ... and beyond." Or, "your annuity payment is determined by your age and the amount you deposit. The older you are, the more you'll receive." Or, language like "current average net-yield."
The thing is, these quotes could be right out of our CGA promotions. But, they were actually taken directly from a U.S. Court of Appeals (Ninth Circuit) opinion in a case just published.
I'll sum up the case for you: there was once a CGA program that was a true ponzi scheme. A guy named Robert Dillie (now serving 121 months in jail) pushed CGAs through investment advisers - giving the investment advisers commissions (big time "no no" under the Philanthropy Protection Act (PPA) of 1995). They raked in $55 million from more than 400 CGAs between 1996 and 2001, and then went belly up. Receiver gets appointed to save what he can to pay back those defrauded. Sues to get back commissions from the investment advisers. Investment advisers claim every thing under the sky, including PPA of 95 protection (interesting to note that the PPA specifically does not exempt CGAs where commissions are involved). Bottom line - court says CGAs are securities and the advisers need to return the commissions they collected.
It is an interesting read for those interested:
http://www.ca9.uscourts.gov/datastore/opinions/2009/06/24/07-15586.pdf
What startled me was the ease at which a court found CGAs to be securities! And the proof - see the quotes above and read the case - that could be any of our charities promoting CGAs.
A couple more Heritage Foundations or real CGA ponzi schemes, and the world of CGAs could easily be headed to SEC regulations. Pretty scary stuff considering we in the charitable world can barely handle insurance department licensing in California, New York and New Jersey. I would venture to say that SEC regulations would be generally be a deathblow to CGAs as a viable planned giving vehicle. It wouldn't be worth it anymore to be in the business.
This case hits home that we in the planned giving business need to be vigilant to avoid promoting CGAs as financial investments. Who knows what the consequences could be? Maybe a disgruntled donor will demand his/her money back, hire a smart lawyer, and use the investment product/securities issue against your organization. There are legal risks involved in all planned gifts. Leaving our CGA programs open to be lumped into regulated securities is just plain foolish.
The behind the scenes talk I have had with prominent attorneys in this field, since this most recent financial collapse, is how vulnerable planned giving program are to potential law suits. And, this case exemplifies how close CGAs in particular are to be dragged into a whole new realm of legal disasters for charities.
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3 comments:
But did Dillie's "investors" also take a charitable deduction generally recognized by the IRS? If yes, wouldn't this qualify them as charitable gifts? When do you get to take a deduction for investing?
Interesting point not mentioned or addressed in the case. Dillie had a foundation and the "donors" should have gotten their tax deductions. What happened after it was found to be a ponzi scheme? I doubt the IRS went after the deductions but they could have.
As for deductions and investments, you have realize that just because a court says it was an investment for the purpose of the case has no bearing on the individual tax returns of the donors. The gov't is just not that organized.
This outcome underscores the importance of communicating to prospective donors that a CGA is a charitable gift first and foremost. Without the charitable intent, a CGA starts to resemble a commercial annuity.
Also, would it be helpful to include a disclaimer that any marketing information is provided for educational purposes only and that individuals should consult with their own tax advisors?
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