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.