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.

Bigger the gift - bigger the scrutiny

Not every attorney will agree with my approach. Here is the theory: the bigger the gift, the more precautions you take. (The question you are supposed to ask is: aren't the precautions the same for all size gifts - at least ones over $500 or $5,000?)

Hear this story and you'll understand.

I received a call from a colleague the other day about accepting a work of art. A university but one that does not have a museum or an art program or even art classes. But, it does have places where it displays art and has regularly accepted works of art as donations in the past (presumably professing a "related use" program so that the donors were entitled to full fair market value deductions for their gifts).

Sounds like they are good to go as far as "related use" (will be discussed below), the first hurdle in accepting a work of art. One fact I left out though: the proposed art donation involves very, very valuable works of art - relatively famous, too. I don't want to give any more details because this one is still in the works. Let's just say a real value of multiple millions - we'll just call it a "Picasso" to give us some perspective.

When the conversation started, I knew enough about the institution to assume that related use would not be a problem and that they could move on towards other complications in dealing with a proposed art gift of any magnitude (which are many).

But, when he said it was a Picasso, I started churning in my mind. And, of course, he also had an art museum expert telling him that it wasn't related use to this institution. (Topic for another blog post - non-lawyers playing lawyer and reaching the wrong conclusions.)

Well, here are some of the IRS private letter rulings on related use mentioned in Tax Economics of Charitable Giving:

Porcelain art related to retirement home's exempt purpose because the objects enhanced the residents' living environment. PLRs 8143029 and 8247062.

Wildlife etchings on public display in state office buildings, ok, too. PLR 8301056.

Displayed stamp collection in University's art gallery plus use in school's art program, ok, too. PLR 8208059

This university in question has some sort of art appreciation or therapeutic thing (not a formal program but something).

Of course, the IRS tells us to rely on private letter rulings at your own risk (like beaches without lifeguards) - the IRS always has the option of ruling any which way they want when they get to your case.

If this had been a run of the mill gift of less than a million, I might have made a different suggestion. But, since this was a "Picasso", I couldn't shake the thought of the IRS art panel reviewing the deduction and somehow this issue of related use coming up.

My suggestion was to hire the best attorney in the area of art contributions you can find before moving forward with the donor. Besides, related use is only an initial issue. Even more daunting is the qualified appraisal (subject of an upcoming blog post). Anything less than having the best counsel reviewing the entire proposed gift would be foolish in this case. Not with a multi-million dollar donor involved and several sticky issues that really could come back to haunt everyone (especially the charity).

The point of this post is this: size and magnitude of a gift makes a big difference in how I advise someone. This institution clearly never ran into issues with accepting art in the past but they also have never had anything of this magnitude. Millions of dollars are at stake in charitable deductions and even though the IRS has never taken issue with art contributions to this institution in the past, nothing is stopping them from taking a hard line this time - especially since it can easily be described as a stretch to claim related use. The private letter rulings seem to point towards this stretch being within reason but you better have an attorney on your side who has been through this before guiding you.

I hope to post updates on this one as it moves forward if my colleague reports back on how it is proceeding.

Just a reminder about what the "related use" rule is (according to the IRS):

A donor is only entitled to a deduction of the "cost basis" (usually the original purchase price) for gifts of "tangible personal property" (i.e. art or collectibles) when "use by the donee is unrelated to the purpose or function constituting the basis for its exemption under section 501." IRS Code Sec. 170(e)(1)(B)(i).

And, let's not forget IRS Code Sec. 170(e)(7) which effectively says that if the charity sells the "related use" tangible personal property gift within three years of the contribution, the gift is retroactively presumed to be "unrelated use" and your donor retroactively loses his or her deduction over the cost basis.

Here are the relevant IRS Regulations on related use, Reg. 1.170A-4(b)(3)(i)and (ii):

(3) Unrelated use--(i) In general. The term unrelated use means a use which is unrelated to the purpose or function constituting the basis of the charitable organization's exemption under section 501 or, in the case of a contribution of property to a governmental unit, the use of such property by such unit for other than exclusively public purposes. For example, if a painting contributed to an educational institution is used by that organization for educational purposes by being placed in its library for display and study by art students, the use is not an unrelated use; but if the painting is sold and the proceeds used by the organization for educational purposes, the use of the property is an unrelated use. 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. If a set or collection of items of tangible personal property is contributed to a charitable organization or governmental unit, the use of the set or collection is not an unrelated use if the donee sells or otherwise disposes of only an insubstantial portion of the set or collection. The use by a trust of tangible personal property contributed to it for the benefit of a charitable organization is an unrelated use if the use by the trust is one which would have been unrelated if made by the charitable organization.

(ii) Proof of use. For purposes of applying subparagraph (2)(ii) of this paragraph, a taxpayer who makes a charitable contribution of tangible personal property to or for the use of a charitable organization or governmental unit may treat such property as not being put to an unrelated use by the donee if:

(a) He establishes that the property is not in fact put to an unrelated use by the donee, or

(b) At the time of the contribution or at the time the contribution is treated as made, it is reasonable to anticipate that the property will not be put to an unrelated use by the donee. In the case of a contribution of tangible personal property to or for the use of a museum, if the object donated is of a general type normally retained by such museum or other museums for museum purposes, it will be reasonable for the donor to anticipate, unless he has actual knowledge to the contrary, that the object will not be put to an unrelated use by the donee, whether or not the object is later sold or exchanged by the donee.

Another gift planning quandry: real estate, the 3 year rule and donor control

As my friends in the planned giving world are finding out, the cost of sharing your "war stories" with me to see a post about your story. This one reminds us about the current post-gift reporting rules but more importantly, finding out the "donor's" real intentions and whether there really is a "gift" here.

This story involves an offer of vacant land where the potential donor says he already has an appraisal for over $500,000. This is a straight gift (no retained income or retained life estate or split interest). Sounds good barring any unforeseen environmental or title issues (not the subject of this post because we are still far away from those issues on this one).

What's the catch?

The "donor" (mind you, this "donor" has actually never given anything to this organization but does profess some admiration) told the development officer that he wants some sort of guarantee that the charity will not undersell the property. In fact, this was why he came to this organization (a message that he will go to another if need be). In my mind, new donors generally don't make first time gifts for $500,000 or more - so this is the catch.

Rule number 1: donor wants a deduction, donor needs to give up control of the property.

My first question is: why does he want a guarantee?

We only speculated but our thoughts turned to the post-gift reporting requirements. For a gift like this (real estate over $5,000), the donor will need a qualified appraisal (a subject for future posts) and the charity will have to sign form 8283 acknowledging receipt of the property and the appraised value.

What is the charity's responsibility when it sells the gifted property? If it is sold within 3 years (yes, 3 years not 2 years - extended in the Pension Protection Act of 06), here is the rule (as quoted directly from "Planned Giving Answers Online" a plug for my friends at EDS):

"Charitable organizations must file Form 8282 (the so-called "tattletale" form) to report to the IRS any sale or other disposition of donated property (other than publicly traded securities) within three years after the contribution if the property was valued at $5,000 or more. When required, Form 8282 must be filed with the IRS within 125 days of the disposition, and there are penalties on charities who fail to comply (up to an annual maximum of $250,000). Charities also must provide a copy of Form 8282 to donors, and additional penalties apply to charities who fail to do so."

Maybe this donor is concerned about his deduction being questioned?

At this point in the conversation, I started getting confused with the special rule for tangible property sold within in 3 years of a gift (an automatic loss of related use and retroactive deduction reduced to cost basis - see http://plannedgift.blogspot.com/2009/07/art-and-other-tangible-property-gifts.html).

Chalk it up to end of day sugar lows. This morning, I scoured my sources and confirmed that real estate gifts do not require "related use" and a sale within 3 years only means that form 8282 has to be filed by the charity - a possible red flag with extreme discrepancies in the valuation verses the actual sale price.

Lastly, we did the obvious and most easily overlooked step: we googled the "donor" and found that he was in the business of real estate. Makes me think he might just have a business motive to see that the property doesn't sell for too low - maybe he's involved in developing the land and doesn't want to see his "gift" undercut the value of the other vacant lots in the area.

At this point, my advice was to get some local volunteers (in the real estate business in the area of the property) to scout the property, do some independent research, and give an informal report as to its marketability.

In the meantime, I would want to meet this donor face to face to get a better feel for the donor. If he really wants to benefit organization, he will have to understand that the charity has to play by the rules (and no legal guarantees of the sale price can be made in writing or otherwise). Business reasons for not seeing the property sell too low can be addressed with split interests or CRTs or other creative arrangements but intent on taking an excessive deduction from a compliant charity is probably not fixable. If the informal real estate committee comes back with a resounding report that the property is worth taking and its likely sale price range makes sense, maybe this goes to the next level (environmental, qualified appraisal, title, etc.).

Stay tuned for part II!

Through the eyes of the gift planner (part 2)

If you didn't see my previous post about a typical gift planning situation click here: http://plannedgift.blogspot.com/2009/07/through-eyes-of-gift-planner.html

Part 2 of the story. Where we left off, we had an attorney asking me to help his client set up both a $1 mil+ CRT and an ILIT (Irrevocable Life Insurance Trust), and there was confusion between who would trustee the gift and so on.

For those experienced in planned giving, the next part should sound familiar. Donor in his mid-60s can not do a charitable remainder annuity trust for much more than 5% due to the low AFR (applicable federal rate). Problem is, the donor wants more (not sure how much more but definitely more than what an annuity trust could offer). And, the donor doesn't want to do a charitable remainder unitrust either. Somewhere in this story, I suspect an insurance salesman (behind the ILIT part) was promising a wonderful plan based on a 6% or higher annuity trust.

So, I ran a calculation to see what a charitable gift annuity would give the donor. Maybe a slightly higher rate and some guaranteed tax free income would help close this $1 million+ gift. The attorney responded to this proposal and was interested. Now my work was cut out for me. I had to somehow get this small organization to agree that it would be better off if its bigger parent org would accept a large CGA on its behalf. Then, I had to somehow get the big org to really understand what it means to accept a $1 million+ CGA and to consider reinsurance over a certain amount. After several calls, emails and memos, I finally thought we had everything set up to go until the last phone call with the CFO (of the smaller charity).

I thought the CFO should know that the larger, parent org would accept the CGA, take on the liability, maybe reinsure part of the gift, and that they should just know what's going on. Then he tells me that he needs to have his own board approve this plan (even though legally there is no liability on their part as they would not be the issuer of the gift annuity). Oh boy. Now I am waiting for the donor's attorney to get back to me and let us know if the donor wants to make the gift and I have a CFO of a related org (and ultimate beneficiary) saying he needs board approval for us to do this gift.

This story just shows you some of the challenges planned giving professionals can face in getting gifts closed. You might need multiple CFOs, Executives, VPs of Development on board and understanding a complex gift - but wavering all along the way. In the meantime, you have a donor and/or the advisor also wavering. And, I wonder what happens when the donor finally says that he/she is ready to make the gift and the intended beneficiary says they still need board approval.

Stay tuned for part 3, if the advisor ever gets back to me.

Final Chapter in the Alabama Hall of Fame Case

This Alabama case and a subsequent real situation has morphed into a classic planned giving ethical quandary discussion. See previous posts under the label Alabama Ethical Dilemma for discussion of when to think twice about accepting a CGA when it is being created on behalf of an incapacitated person.

When we last left off, a friend had read my blog (about the Alabama case involving a CGA created by a son/guardian where a court later took back the funds because the CGA didn’t make sense in his mother’s overall estate plans) and called me about their own quandary. With a check for multiple hundreds of thousands of dollars in hand and a “power of attorney” cousin wanting to create a CGA for her 90+ incapacitated relative with no history (giving or otherwise) with the organization in question, we were trying to figure out how much due diligence should be done before completing the gift (thinking positively). And, based our discussion, they called the “power of attorney” to see if there were any children or siblings who should be notified of this big gift.

Well, they confirmed that there were no children or grandchildren. So, they finalized the gift.

Why this postmortem post? They admitted to me that the “power of attorney” didn’t sound too pleased to answer the questions so they cut off the questioning – not to jeopardize the gift. My problem is: why should the “power of attorney” be concerned about answering questions? She is taking hundreds of thousands of dollars out of this incapacitated relative’s estate. I would think that some caution and transparency would be what everyone expects.

To the organization's credit, this was not the only charity that the “power of attorney” was creating CGAs for, so if it ever becomes an issue in a surrogates court, at least the story in the NY Post or Daily News will have several charities to mention.

Something though has me thinking that this is probably a case of an underlying family dispute and the emptying of the elder great aunt’s estate at the expense of others. Will it stay off the radar of the eventual estate and executor, if the CGA is being used to cut out inheritances to more direct relatives?

This is another example of where a carefully drafted gift acceptance policy could have solved this quandary for us. The policy should say that the organization does not accept CGAs created by representatives/guardians/power of attorneys unless….

You fill in the blanks. How about a form signed by the guardian or power of attorney? How about a requirement that the institution confirm from an objective, third party that the gift makes sense and is agreeable to all living next of kin of the donor’s estate?

If you are a trustee of an organization that manages a gift annuity program, wouldn’t it make sense that out of the ordinary, sticky situations be brought at least to a gift acceptance committee or an executive committee to assess the risks involved? Isn’t there a risk that a guardian or power of attorney is overstepping their bounds – even if on paper they are allowed to make a gift – and that the there could be negative consequences down the road?

Better yet, is accepting a gift like this the right thing to do?

Follow-up to Alabama Hall of Fame CGA

This should make an important chapter in my online book in the section on sticky ethical issues. As a follow-up to the Alabama case reported in my previous post (http://plannedgift.blogspot.com/2009/08/hall-of-fame-cga-interesting-alabama.html), one of my friends/blog readers called the day after that post with a ripe quite question right on point and one many planned giving folk deal with periodically.

Here is the story (facts altered, of course). Charity already has in hand a check (for hundreds of thousands of dollars), a copy of the durable power of attorney (reviewed - let's assume completely legal), and the agent/attorney-in-fact (a supporter of the org.) ready, wanting and able to sign off on a CGA for her 90+ relative (not parent or sibling).

Legally, there is no question whether this gift is acceptable - at least right now.

What are the questions we should be thinking about based on the reading of the Alabama case?

My first question: does the 90+, obviously incapacitated "donor" have any giving history or other inclination towards the organization? The agent/attorney-in-fact does, yes. The "donor" in this question does not (if she had been, I would have been less concerned about the next questions but would have still asked them).

Next question: do we know anything about the donor's overall estate? Is this a small part of her estate? Is this a large part of her estate? The point I am getting at is whether this "gift" makes sense at all in her overall financial and estate plans.

Most important question: Are there other living beneficiaries (i.e. children - or anyone else who would stand to inherit from the donor besides the agent/attorney-in-fact)?

This is a really tricky situation. My initial response was that they should contact a known financial adviser of the donor (revealed in the power of attorney paperwork) and see what he/she thinks. Problem is that the agent, who is the real donor here of a really major gift, didn't tell them to call this person. Do they start meddling around this person's back - possibly causing the agent to withdraw the offer?

I have to admit that I personally have taken gifts like this through agents. I have even helped a charity orchestrate a "death bed" CGA. But, as far as I can recall, these were always gifts being made by next of kin - those who would have inherited the money anyway. So, even where the donor didn't have a history with the charity, no one was getting "cheated." Here, we weren't sure if the agent was the next of kin or not. And, if there are next of kin, maybe they should be consulted as this "gift" will have a direct impact on assets they would likely have received.

To top this all off, in this year, when numbers are down, this is a really important gift. No one at the organization will be thrilled if it doesn't happen. Problem is: we know that some more due diligence needs to be done or else there may be a surrogate's court taking the money back and possibly a non-flattering story in the New York Post (and not so far off in the future).

Regardless, our job as gift planners - from an ethics point of view - is to do the right thing and not just take suspicious gifts without investigation. And, not to be clouded by the fact that we will take the credit for the gift today. Someone else may have to clean up the mess in years to come and it won't be pretty. This gets back to another of my ethics posts (http://plannedgift.blogspot.com/2009/08/planned-giving-buck-stops-with-us.html), the ends can't justify the means. We have to take the high rode even when it means passing up on oodles money.

In the end, the consensus was to confirm from the agent if there are other next of kin of the "donor," and if there are, to ensure that they are informed of the gift. And, to put a memo in the file detailing this information and writing a letter to the "family" in appreciation for the gift (and put it in the file). If they can't do that - I really doubt this is a proper gift. A tougher attorney may have even required the next of kin to sign off that they are informed and happy with this gift.

Important Legal Ruling Impacting Planned Giving Marketing

Charitable gift annuity marketing scrutinized

The U.S. Court of Appeals for the 9th Circuit issued an opinion in a case involving Robert Dillie, this past June. Mr. Dillie operated a fraudulent foundation between 1996 and 2001. This foundation was in actuality a ponzi scheme which issued $55 million in gift annuities to over 400 donors, sold through investment advisers who were receiving commissions on the sales of new gift annuities. He is now serving 121 months in prison for his crimes but the legal fallout from his nefarious operation lives on.

The receiver assigned to recover any remaining funds to repay defrauded donors sued the investment advisers for the return of their commissions. The Federal Court of Appeals, the highest level court below the U.S. Supreme Court, rejected the various arguments by counsel for the investment advisers and concurred with lower court rulings requiring the return of the commissions.

While the underlying facts of this case were truly unique, the significance of this ruling is how the Court viewed gift annuities in light of the marketing techniques used. This can be best exemplified in the first few sentences of the opinion:

This appeal presents the question, inter alia, of whether the charitable gift annuities sold in this case were investment contracts under federal securities law. We conclude they were, and we affirm the judgment of the district court.

Not only did Robert Dillie promise his investors “a gift for your lifetime and beyond,” he pledged “preservation of the American way of life,” “preservation of your assets,” and “preservation of the American family.”

The Court looked at the various gift annuity promotional advertisements used by Mr. Dillie, all of which are very similar to those used in the marketing of gift annuities throughout the non-profit community. And, the Court had no difficulty at all in concluding that gift annuities were in fact an investment contract under federal securities law, despite specific exemption from such laws under the Philanthropy Protection Act of 1995 (“PPA”).

While Mr. Dillie’s scheme specifically violated the PPA by offering commissions, this point was not used as a reason for its conclusions and the case certainly raises the specter of potential Securities and Exchange Commission regulations for charitable gift annuities. Even more troublesome for charitable entities is the potential for a disgruntled gift annuity donor to use legal standards from the area of investments and securities in any legal conflict with a charitable institution over a gift annuity.

The “take home” conclusion of this case is that charities should be very careful in their marketing of gift annuities and other life income vehicles. A court will certainly look at advertisements and direct mail pieces in any potential litigation. Therefore, it is extremely important to emphasize that charitable gift annuities and other life income vehicles are first and foremost gifts.

A copy of the opinion can be viewed at:

http://www.ca9.uscourts.gov/datastore/opinions/2009/06/24/07-15586.pdf

Planned Giving - The "buck" stops with us

In light of the recent scandal in New Jersey, and my dedication to warning against risky/questionable insurance deals for charities (as seen in my coverage of Barry Kaye's reported troubles in the press), its as good a time as any for the fundraising world to do our own soul searching and remind ourselves of some basic values that we need to live by.

Did anyone notice that part of the scandal involved the use of non-profit entities for money laundering? Personally knowing about this particular community, I can guarantee 100% that the "profits" from the alleged money laundering through those charities was for the charities - not someone's pockets.

Doesn't make it right. In fact, it was the worst thing they could have been doing with their charitable entities - the consequences destroying precisely what their missions are supposed to accomplish.

While I wouldn't jump to classify the various charitable insurance schemes and other "pushing the envelope" plans out there as criminal activities (as money laundering certainly is), there is a common denominator between them all. The question is how far should your non-profit organization go to raise money for your worthwhile cause?

Do you help your donors commit tax fraud by accepting donations that are really to pay private/religious school tuition? Or, do you "pay" your private/religious school teachers by reducing their tuition bills? Or, do you get involved in one of these impossible to understand insurance arrangements that might magically bring in a big wind fall for your charity? Or, do you join a multi-organization raffle that is clearly violating numerous federal and state regulations? I could go on all day - these are real situations that I come across all the time.

Planned giving, as a field in particular, has always been about doing the right thing for your charity and for your donors, within the boundaries of the law and with ethics. Numerous times, I have had to explain to donors or advisers that I only work within the boundaries law. Gift planners play by the rules, that's our game.

We take pains to inform donors of the consequences of their gifts, even if it means the gift won't happen. We sit through countless classes given by lawyers reviewing all of the various legalities involved in giving. We have a code of ethics promulgated by the national planned giving organization and they even ask you to attest to them before attending their conference.

The planned giving community screamed out against flim-flamsy split interest insurance deals (donors get charitable deductions on life insurance premiums but family gets most of the death benefits). We self regulated the donor advised fund business for 30 years (without scandal until the IRS idiotically gave the Fidelity Gift Fund its 501(c)(3) status). The field voluntarily adopted various codes of ethics and always comes out against the latest "can't be beat" plans that are legally questionable .

Bottom line for charitable institutions is that these no easy way out of good, old fashioned fundraising. Asking for money - that is how over 200 billion dollars a year in this country is raised. Various schemes, selling of products, other business entanglements, just don't compare to tried and true ways of raising money (major gifts, annual fund, direct mail, events, etc...).

Just think twice before you step outside of the traditional fundraising realm to raise funds for your charitable institution. Is it legal? Are you really running a business out of your charity? What are the potential consequences of government scrutiny? What are the potential consequences of this getting into the press? Does this make sense for your charity to be involved?

To quote one of my former clients who refused to be involved in one the insurance schemes discussed recently in this blog: "thank goodness we passed on this one."

Art and other tangible property gifts

My day started with a call about a donated work of art, already in possession of the charity (not a good sign), at significant moving expense (another not good sign), from a donor with no previous giving history (a 3rd not good sign!) who is demanding that the charity provide a dollar figure for deduction purposes in the acknowledgment letter and refused to get his own appraisal (but wants a deduction - the worst of all signs). This is a really common situation and it would be easy for me to suggest that they just go with their standing gift acceptance policy - no valuations provided for gifts of art.

Problem with that advice is that in the real world, development professionals are in the business of keeping donors happy, making friends (not enemies), and exploring development opportunities when they arise (and not everyone has many of those today).

My first question - is it worth $5,000 or less? Answer: donor thinks its worth up to a $100,000; development officer has no idea what it is worth. (read part II below to see why that is important)

Second question: what are you planning to do with it? Answer: permanently place it in a new building - no intentions of selling. (read part I below to why that is important)

In case you are wondering if I am going to discuss the related use rule - the answer is no (this case doesn't involve the related-use rule - they have a museum, the piece completely fits in with theme of the institution)

The question here is about acknowledging art and other tangible personal property when the donor is not cooperating the way we would always like. Seeing that the development officer was in a bind, we came up with the following:

Let's find out about adding this piece of art to the institution's insurance policy - maybe they require some sort of appraisal. Find out the cost of obtaining an appraisal for insurance purposes. And then make a decision. If the cost is relatively low and the institution would get one anyway - to insure the piece - then get the appraisal. Then we draft a letter that carefully states the facts very accurately so that it is clear in the letter that the appraisal and value we came up with is for our own purposes and that he should seek his own counsel to determine the deductibility of the gift.

Or, the decision is not to spend anything on the appraisal and stick with the gift acceptance policies "come hell or high-water" (i.e. live with the consequences that not every donor can be made happy).

The lawyers and lawyer-ly minded people reading this blog are probably screaming in their heads - how can I even suggest putting any dollar amount in the letter? Well, firstly, anyone reading this blog needs to seek their own legal counsel - my own caveat. Besides being a lawyer myself, I seek legal counsel too and the advice I got was that if forced, just describe where you got the valuation from and put in the CYA caveats in the letter. It is not ideal and I told the caller that they may just want to hold their ground and accept the consequences.

This situation probably would not have reached me if the charity knew of the donor's demands BEFORE accepting the gift. It shows you how important it is to have a gift acceptance policy that "ties your hands" before accepting such gifts.

Anyway, I am including two short pieces below I wrote earlier this year about tangible property gift rules. These will all be chapters in my book! My blog book that I am writing and will somehow compile as a guide to planned giving.

And, don't forget to forward links of these blog posts around! I am still in the proving phase of this blog and the more readers, the better chance it will survive and get better.

Part I - Selling Donated Art and Other Tangible Property Gifts

In light of recent stories in the press about some universities selling donated works of art to replenish endowments, we thought this would be a good opportunity to revisit this thorny question. Many of us may have missed an important change to charitable giving laws in the 2006 Pension Protection Act (“PPA”) regarding gifts of tangible personal property like artwork or even equipment.

Generally, donors receive a fair market value deduction if their tangible property gifts have a “related” use to your institution – otherwise the deduction is limited to the donor’s adjusted cost basis (in other words – the original purchase price of the item). Many of us recall that a separate rule requires a charitable recipient of such gifts to file a form (Form 8282) with the IRS when your institution sells or otherwise disposes of the property within 2 years (the IRS’ way of red flagging overvaluations or improper related use gifts).

That was generally the law prior to the PPA. But, the PPA significantly changed both rules, in effect melding both the related use rule and the Form 8282 requirement together. Now, the rule is that any gifted tangible property that is sold or otherwise disposed of within 3 years of the date of gift requires the filing of Form 8282 AND creates a presumption that the donor’s gift was NOT for a related use. In fact, the statute calls for the donor to retroactively lose their deduction taken above their original purchase price.

Part II – Gift Acknowledgment Letters and Qualified Appraisals

Acknowledging gifts of tangible property, including art and in-kind gifts (excluding automobiles which have special rules), can be very challenging and some of the rules are easily forgotten or misunderstood.

There are two general categories: those tangible property gifts valued at or less than $5,000 and those above $5,000. (All gifts less than $250, cash or otherwise, technically do not require even a receipt.)

Tangible property gifts valued at or below $5,000 will require a receipt from your foundation but the donor is not required to obtain a qualified appraisal outside of describing the method used to determine value on his or her tax return.

The second category of tangible property gifts is for gifts valued over $5,000. The donor in these cases is required to obtain a qualified appraisal to claim a charitable deduction for. The appraiser must "hold himself or herself out to the public as an appraiser." The qualifications of the appraiser also must include the ability to appraise the specific type of property involved, and he or she must be independent. The appraiser must not be a party to the gift, and may not be the charitable donee or an employee of either the donor or donee. The appraisal must specifically address the physical condition of the property and the factors appropriate for valuing that type of asset. These are just a summary of the rules involved with qualified appraisals which you can provide to your donor as long as you also include written language urging your donors to seek legal or tax counsel to determine the legal effectiveness of any appraisal obtained for deduction purposes.

As most should know, the qualified appraisal requirement is the responsibility of the donor. You should not attempt to obtain one on behalf of the donor. If pressed, you may need to help your donor find an appropriate appraiser. In such cases, try to provide three appraisers and always include caveat language in writing stating that your donor’s legal or tax counsel should assist the donor in making a final determination as to the qualifications of an appraiser.

Another challenge fundraisers face is when donors request a specific dollar amount in their gift acknowledgment letters, whether for gifts above or below $5,000. In no way should your institution be seen as providing gift valuations. There are potentially serious consequences for your donor and your institution should a fraudulent gift valuation be found by the IRS. Rather, your institution should consider adopting a policy of never providing a dollar amount value in the gift acknowledgment letters of tangible personal property. A full, non-monetary description of the property should suffice.

If your donors are adamant that a dollar amount should be in the letter, then your gift acknowledgment letter can describe the property and then state a value “as provided by your own valuation” or something to that effect. Stating in the letter that the valuation was provided by the donor is an option several attorneys have suggested in these situations – your own charity’s legal counsel should be consulted on this question. Additionally, it is always important to include language in your gift acknowledgment letters that strongly urges donors to seek “independent legal or tax counsel in determining the amount deductible for federal tax purposes.”

Through the eyes of the gift planner

The job of the gift planner may seem relatively easy sometimes. An "off the radar" donor leaves your organization a whopping bequest - how hard is that? Sign the release and receive the money!

Or, like the call I received this week from an estate planning attorney going to set up a $1 mil+ CRT for his client - sounds easy enough. Think again.

Then the conversation starts with the attorney. He wants our sample form CRT doc's - Harvard gave him some for the previous CRT his did for this donor. Easy enough - I get two vetted samples from a bank - the bank we could use if need be to manage the trust.

Who is going to be trustee? The charity involved doesn't manage any planned gifts, yet. At first, the attorney says he'll take care of it - but in the second conversation, it becomes clear that they (donor and attorney) expect the charity to really do most of the lifting. OK - does this charity kick off its own planned giving program or does it bring the CRT to its system parent (which has a program for its constituents and the bank ready to manage)?

Then the conversation continues. The donor is going to be purchasing wealth replacement life insurance through an Irrevocable Life Insurance Trust (ILIT). The attorney asks me if I have any samples of these? I start to wonder?

I check with the bank that would end up trustee'ing the CRT if they choose to bring it to the system parent. They have personal trust services that do it. What is "it" that needs to be done with an ILIT? Actually, what is an ILIT? In short, it is a device for keeping life insurance death proceeds outside of one's taxable estate by making the ILIT the irrevocable owner of a life insurance policy. Gift transfers happen when the insured contributes annually to the ILIT for the policy premiums - potentially taxable gifts if over various limits. In theory, you could put $1 mil into a CRT, give the income from the CRT to your ILIT which owns a policy for $1 mil - add it up, kids get $1 mil with no estate taxes, charity hopefully gets its $1 mil, donor rec'd an immediate income tax deduction, avoided cap gains on funding stock, maybe gets some extra income in later years, lowered his taxable estate by $1 mil. But, these have to be done right or the whole point could be lost. Annual "crummy" (the legal term from a case by a guy named Crummy) notices letting kids know that they received a gift need to be sent and saved, etc...the IRS loves to knock off these in estates, easy money for them. No charity should ever be involved - it is a personal estate planning tool and risky if not handled right.

This started as "easy as pie" and all of a sudden, it is really complex. You see, we have an attorney that might not be able to do everything his client needs. We have a donor who wants to see this done without big legal bills and fast (even though it has been many years in the making). We have a charity that might have a finance person with the idea that they can kick off a planned giving program with a snap. And, we have an established parent system program with a bank ready to handle everything (wink, wink), even the ILIT for the donor.

The challenge for me is to guide the client and the attorney/donor to a successfully closed gift that makes sense for everyone. From my experience, everything is telling me that we should bring this donor to the parent system's bank and they will do everything - and at reasonable fees. But, it isn't my decision to make (especially since I am only a consultant - a stand-in planned giving director).

On top of everything, the attorney wasn't set on which type of CRT. CRAT or CRUT? In my head, everything is telling me CRAT. I call this "seeing the future." I know what usually happens - CRUTs sound great at first but donors get aggravated when the income fluctuates from year to year, especially when it goes down. And, I am imagining this charity trying to run a CRUT themselves in-house. I don't even want to go there. Yes, these situations are why I am in business but it is still my job help avoid foreseeable problems.

To be in continued next week!

Have a great weekend!