As the jagged ripple of our economic situation continues to influence every aspect of our lives, a recent Wall Street Journal article on Gift Annuities caught my eye.
The article, “Donors Find Gift Annuities Can Stop Giving,” reviews how the market’s turmoil has sapped some charities’ ability to pay out promised yields.
This is an issue that many anticipated coming the surface, and the article does a great job explaining just how quickly and powerfully the current economic climate is affecting charitable giving.
Charities Have Portfolios, Too
Larger charities that are capable of doing gift annuities usually have some form of endowment. Consequently, this puts them in a similar position of a commercial for-profit insurance company. The charities may feel the squeeze as their portfolios drop, but their commitment to provide stays the same.
The financial pressure on them is obvious.
Gift Annuities are typically backed by the charities. Donors make tax-deductable contributions to the charity. In exchange, they receive regular payments for the rest of their lives. Generally, about half of the initial gift remains with the charity when a donor dies.
A souring economy has prompted charities to turn to insurance companies to back up their obligations after they saw their reserve funds wither.
Are All Charities in Trouble?
No. It really depends on the charity. The National Heritage Foundation, which was featured in the WSJ article, could be an example of a charity that is clearly in trouble. It declared bankruptcy in January and stopped making payments to many donors.
Just because a charity has a heart and a loving mission that does not mean it will always be there to make regular payments to your client.
Due diligence is the critical component.
One of the reasons we often recommend clients consider a Charitable Remainder Trust (CRT) is to keep them in control of the investment and the income during life.
While a CRT can be more complicated than a Gift Annuity, we know the money will be there when you need it.
Questions to Ask Any Charity Offering Gift Annuities:
- How much of my gift will go toward charitable work?
- How will the charity invest the gifts?
- Has the charity ever had trouble making annuity payments?
- What is the state of the charity’s reserve fund?
- Does the charity “reinsure” annuity contracts with insurance companies?
I hope this article helps you and your family. As always, if you have a question or concern about a specific case, please contact our office.
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