Disclosing Deferred Gift Annuity Rates
(Added 7/1/2011)
I've gotten some flack from some people about how we advertise deferred gift annuity rates. I work at a small liberal arts college as the planned giving director and, during this economic crisis, gift annuities have been very attractive. In an effort to get more people to buy gift annuities, I decided about a year ago to approach younger people with the idea that they buy deferred gift annuities - they don't need the money now and it's a great way to guarantee income for later years. I spoke to a 40-year old person the other day and told him that when he's 65 he would be receiving a 14.8% investment return on his $10,000 gift, which is far better than the 3.8% he'd be receiving if he bought an immediate gift annuity. He loved it! Who wouldn't? How can I tell the people giving me flack that they don't know what they're talking about?
Where to begin? Although ethics is largely about doing the right thing in the absence of legal restrictions, true ethical behavior requires applied intelligence as well. As we in planned giving are almost always talking about a time span between when the gift is established and when the gift is available to the charity (assume, for our purposes, that gift annuity assets are not used by the charity until the annuitants die), we really must understand how time affects the value of money. To be direct, and perhaps unkind: Your donor is receiving nothing near 15% on his gift. From a solely financial perspective, which seems to be your main marketing approach here, it's not a good deal for him.
Just assume for a moment that he put that $10,000 away into a real investment and earns 6% each year. By the end of 25 years, he'd have almost $43,000. A 3.8% payment against that is over $1,600; a 5.3% payment, which is the current immediate rate for a 65-year old, is over $2,200. And you're boasting about payments of less than $1,500?
But let's not get hung up on the numbers. The reason your donor is so ecstatic is that, essentially, you're not telling the truth. And not telling the truth has elements of being unethical (just sayin'). The important part of understanding this problem isn't the math; it's one of disclosure. The good news, if we can look at it this way, is that you're not alone. After I got your note, I went to an online presentation of deferred gift annuities. From my perspective, not good: No one, it seems, dare speak that scary truth: time erodes the value of a dollar.
Sure, tell me that the donor is thinking about the charity, and that whatever is lost compared to the gains the real investment world might produce is a measure of generosity. I could go with that. But let me ask you: Is it fair to impose generosity on someone without his knowledge? Let me ask you: Is such a misunderstood financial erosion generosity at all?
No one at a charity should permit a donor to establish a deferred gift annuity without a discussion of the present value of money. What would this asset be worth tomorrow in the absence of a gift commitment today? If, presented with honest assumptions, the donor understands, then go for it. Otherwise, you're cheating him. And, by the way, this topic really ought to be part of your disclosure statement.
A couple of (relatively) minor points: You don't "sell" and your donor doesn't "buy" a gift annuity. Despite all the marketing hype to the contrary, making a charitable gift is first and foremost a charitable act, not a commercial transaction, and your vernacular should reflect that. Also, an annuity - gift or commercial is not an investment; it's a payment in exchange for transferring an asset. What happens to the asset after the exchange is irrelevant to the promise of payment.