Gift Annuity Reserves
(Added 7/9/2010)
We've had several gift annuities go south south of south, actually, to the point where we have used up the original gift amount and now must make payments from other sources from within our gift annuity pool. That is, from other people's gift assets. Is this right? How can we avoid doing this, as we are obligated by law to make payments, even if the original money is all gone?
This shines a different light on the question about offering rates higher than those recommended by the American Council on Gift Annuities (see the July 2009 - 'Gift Annuity Rates' column). When I was introduced to planned giving (in the 1970s), everyone, as I recall it, said that a gift annuity was the 'easy' gift, the gift that requires only a simple one- or two-page agreement and no messy trust language. There is no confusing four-tier taxation system, and the gift annuity generated a predictable income (it's not 'income' those checks represent 'payments,' but that's another matter). Simple, no fuss planned giving.
Until it got complicated. Like when all those growth predictions went south.
Today, I know of many gift annuities that are, like many mortgages, under water; the asset base will ultimately not withstand the payments. For example, a seven percent payment on an asset that is now half as large as it was originally because of depleted investment returns is now a 14 percent payment. The life span of the asset representing the gift may be shorter than the life span of the annuitant. Why we get into these messes is a topic for another day, however; the issue now is what to do.
Whatever is done ought to be the result of a policy that addresses this situation. Most organizations don't have such extensive policies, however, and, like you, are stuck between the need to make payments and the need to find a source for those payments.
If you pay from the reserve pool, you effectively reduce everyone else's gift. All donors are affected and will eventually make a lesser gift than would otherwise be expected. How right is that? Perhaps that would be the best policy, however, bad as it may seem, if there were a policy that clearly spelled that out. That way everyone knows the deal before the gift is made. (Want to bet how many gift annuity disclosure statements address this issue?) Another possibility is to make the payments from another source, from somewhere in the operating budget not that it would be a popular choice among those depending on the charity's budget to fund their programs.
But what else can you do? The constant in the decision-making process is the absolute need to make the payments. From there you have options but whatever you choose, you should do so with a rationale with which you are comfortable and which is outlined in a policy.