Are Gift Annuities Still a Good Fundraising Tool for Nonprofit Organizations

Are Gift Annuities Still a Good Fundraising Tool for Nonprofit Organizations?

By Tom Wilson Major Gifts Guru

I know enough about planned estate giving to market all of the basics, to excite potential donors, and to call on outside expertise when a gift gets complicated.

I advocate that all major gift officers should know the basics of planned estate giving so they can hear gifting noises in this arena of fundraising. When you build a relationship with a donor they want you to handle all of their philanthropic needs within the organization.

I got first hand experience in planned estate giving Sun City West, Arizona for a year as a resident consultant for a hospital’s capital campaign. While we accepted some cash gifts, the basic marketing effort was oriented to securing planned estate gifts. I learned by doing.

As a reminder, the reassuring part of planned estate giving is that 87% of all gifts are done by simple bequest.

One intriguing tool that is more complicated is the gift annuity – a donor turns over a lump sum of money in exchange for a fixed return for the rest of their life. The percentage of return increases with the donors age and can provide an excellent return for donors in their mid 80s and 90s.

Nonprofit organizations have generally assumed 50% of the initial gift annuity would be retained after the death of the donor. With a strong stock market over the past 15 years, many charitable organization have done far better than that.

A recent article in The Chronicle of Philanthropy (7/2/09) did a great job of reviewing the value of gift annuities in our “new” economy. Here are some highlights.

Some annuities which have now suffered through two market corrections in the late 1990s and now in 2008 may end up with no charitable remainder, and even could be a risk to the nonprofit – by law the payments to annuity donors is guaranteed by the assets of the organization

The American Council on Gift Annuities notes that 4,000 charities in America issue annuities

• Some organizations with large pools of annuities are no longer withdrawing assets upon the death of a donor, but leaving the remaining asset in the pool to protect the future of the organization (which of course defeats the purpose of securing these types of gifts)
• For organizations with only a few annuities the general recommendation has always been to reinsure them by selling them to an insurance company. Now some organizations with large numbers of annuities are going the reinsurance route. This enables the nonprofit to get immediate cash from these gift instruments even if only 30% of the face value of the gift is realized (versus the long-held assumption of 50% or more).
• Another organization reported that it is drawing 7.5% from the liquid pool of annuity assets (the remainder of funds after a donor passes away) leaving the rest of the remainder assets in the pool to help reinsure itself. This is a neat idea (although you may want to take it to 5% to treat the remainder funds as a virtual endowment as well as backstop to your other annuity risks).

Bottom line – if you’re offering gift annuities right now, look at all of your policies and consider reinsurance or retaining assets within your pool; or if you’re not offering gift annuities, maybe wait a year before starting to get into this aspect of planned estate gift fundraising.

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