Planned Giving Lesson of the Week - To Start (or Keep) a CGA Program or Not?

I struggle often about gift annuities ("CGA") - are they all they are cracked up to be (for nonprofits)?

Even before the market crash last year, various state regulatory struggles have made it more and more difficult to operate widespread, multi-state or national gift annuity programs.

Throw in market volatility and other investment uncertainty, and if you start to understand how pension investment/risk management should be handled, you really have to wonder whether it is worthwhile for charities to start new CGA programs or for smaller ones to continue stagnant ones?

This is coming from a guy who is paid to setup/run/oversee CGA programs and has done the licensing in New York, New Jersey, California, Florida, and lots of other places for multiple jobs and clients.

At the past planned giving group meeting in NYC this week, I was the moderator for a panel on CGAs with 2 panelists being from large established CGA programs and one being from a large investment/administration provider.

The panelists were terrific, exposed the audience to some of the higher levels of planned giving experiences out there. But, my question did not get directly addressed.

The answer to my ongoing question of whether CGA programs are worth it or not for many charities actually started to come to me during the networking, drinking stale diet coke session before the luncheon.

It was a conversation with an old friend, who is at a charity which myself and my firm had lost out to on a bid to provide planned giving consulting. Two years after we lost the bid, and they were already bringing in $1 million plus in CGAs a year. What were they doing? Two direct mail letters a year to an approx. 100,000 database of potential planned giving prospects (this is a well established national emergency aid charity that had just never gone heavily into planned giving but was already receiving a significant percentage of bequest revenue).

Then the panel started. The biggest institution represented was mailing 1.8 million CGA "solicitation" pieces a year. The other institution was marketing CGAs consistently to 137,000 members - no age overlay but likely that most were age appropriate.

I hope you are getting the message. Building a successful CGA program is numbers game. In the scheme of things, as great as your PGCalc/Crescendo illustrations look, most potential planned giving prospects will overwhelmingly not commit to irrevocable gift arrangements - people just don't part easily with their money.

But, if you have the numbers, I mean really large numbers of prospects and you commit to marketing intelligently to those prospects, you will close gifts and more than justify this "pain in the ass" CGA program.

Is there a magic number? No. And, of course it costs plenty of money to market to a 100,000 plus database. You better think about whether this database of prospects are really prospects.

And, what if you are raising a lot of money from a small amount of donors? Let's say a few thousand (like I hear in conversations all the time). Is a CGA program for your institution? Probably not, or at least not until you build large numbers of annual/direct mail donors into your database.

To be continued. Have a great weekend.

Planned Giving Articles - Et tu, New York Times?

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

The link is below but here is my introduction:

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

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

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

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

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

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

Third point - this is a quote from the article:

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

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

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

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

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

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.

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.

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.

Second Thoughts on Forbes Article

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

The Forbes article is no different.

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

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

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

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

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

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

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

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

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

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

FASB Liability vs. Required Reserves

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Hall of Fame CGA - Interesting Alabama CGA Case

This recent case doesn't have wide-spread legal significance as it is from Alabama and the facts are rather unique. But, the facts provide some worthwhile ethical guidance when dealing with similar cases.

http://coa.courts.mi.gov/documents/OPINIONS/FINAL/COA/20090709_C282979_61_282979.OPN.PDF

Let me sum up the case: Mentally incapacitated elderly mom, son looking to enrich himself at the expense of his deceased brother's children. Son donates $300,000 of mom's funds, in his role as conservator/guardian, to the Alabama Sports Hall of Fame for a charitable gift annuity. 8%, two-life, mom first income beneficiary, son the second income beneficiary. It wasn't so clear if he really had a right to do this or not. Lots of various arguments proffered, as lawyers will do.

Listen to the court's reason in deflecting the son's argument that he could make such a "gift" of 67% of his mother's assets: "Furthermore, there is no evidence that Roosen (the mom) might have been expected to make a charitable gift in the amount of $300,000 to the Alabama Sports Hall of Fame."

In other words, in situations where a conservator/guardian wants to make a significant charitable gift such as a gift annuity, there better be a history between the "donor" and the institution. And, the size of the gift has to make sense within the entire estate of the older person.

Getting back to basic ethics, should the Alabama Sports Hall of Fame have accepted this gift in the first place? This one should have not passed the "smell" test - son creates really big CGA with mom's money to benefit his mom AND HIMSELF. Maybe the institution didn't know that his brother had died 4 years earlier, had left a few children, mom wasn't there mentally anymore and that the son's right to do this was in question (even if he was officially the conservator/guardian at the time). The Hall for sure had to return any funds left of the CGA - maybe the entire $300,000 (that wasn't clear from the ruling).

Another tidbit. Even if the Mom loved the Alabama Sports Hall of Fame, gift planners should always be on the look out for future litigation. Here is the general rule: if children or other relatives would receive funds from an estate if the decedent didn't have a will, that person has standing to sue. Standing is everything in these cases. It could also be established by a preceding will (if it's found). Once someone has standing to contest a will or other things in an estate, out of the ordinary charitable gifts will be ripe for scrutiny. I think if they had known of the general facts surrounding this donor, they should have stayed away.

I had a situation a few years back with a client and FORMER planned giving director. The former planned giving director was pushing a donor in her 80s to do an irrevocable life estate gift to the charity (multi-millions in value). The FORMER employee's reasoning: the daughter might challenge the estate and it puts the charity in a better position. The FORMER employee actually admitted that she suggested that the donor name the charity as executor of the estate - also to help against litigation. My response: what a disaster the FORMER employee was creating and she was even limiting their chances of receiving a bequest. I told the client - good thing it was a former employee and to take the high road as to everything they were doing with this donor. In other words, I advised them to strengthen their legal position vis-à-vis this donor (give proper public recognition, back off pushing anything that could be seen as overly aggressive, reach out to the child in friendly terms, etc.) because the entire giving was a risk by the overly aggressive actions of their previous planned giving director.

Once you realize that a child in particular may not be interested in the gifting of the elderly parent, you better think twice before pushing large, irrecoverable gift arrangements. And, a child making a gift for an incapacitated parent should also raise a red flag. Maybe all children or other beneficiaries should be consulted prior to considering such a 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

You have been warned! Finally, a legal decision that hits directly at gift annuity promotion

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.