San Diego Union-Tribune (Sunday)
WEIGHING RISKS WHEN DONATING
A charitable gift annuity is a way to ensure regular income while also leaving a donation behind, but the coronavirus is squeezing some previously solvent schools
Many colleges and universities are struggling to reopen safely and offer in-person classes during the pandemic. At risk is not just the health and safety of their students, faculty and staff, but in many cases the financial viability of the institutions themselves if they have to go to remote learning, which could prompt students and their families to demand reductions.
Financial hardships are inevitable for all but the largest universities with multibillion-dollar endowments, and a lack of paying students could force some closings.
That raises questions for supporters who have made donations to these colleges using the most popular planned giving tool: a charitable gift annuity.
These annuities are similar to commercial annuities, with one key difference. In a typical annuity, you would invest a sum and in return receive a regular payment until your death. After that, what’s left goes to the insurance company as profit.
With charitable gift annuities, donors still receive regular annuity payments, but whatever is left over goes to the nonprofit as a gift. They have been working this way since 1843, when the American Bible Society underwrote the first such charitable annuity.
Michele Murphy, a retired lawyer in Palm Desert, who has set up charitable gift annuities at two of the University of California campuses — Los Angeles and Riverside — as well as Loyola Law School, said she was worried about their fate.
“We felt comfortable with the risk at that time,” she said. “We understood we were ‘first in line’ creditors if anything happened to these institutions, but felt that if the entire University of California system and/or Loyola Marymount University were in trouble, we would have a lot more to worry about.”
But with colleges and universities struggling during the pandemic, Murphy worries that her annuities may not provide guaranteed retirement income. “In my wildest dreams and speaking as an extremely risk-averse person, I would never have expected that the future of these schools or our CGAS could be in danger because of a pandemic,” she said, using shorthand for charitable gift annuities.
With all of the things to be concerned about right now, one bit of reassurance is that experts say these annuities should be relatively safe. Few nonprofits have defaulted on their annuity obligations. Experts say that donors should remain vigilant in how they select the nonprofits that will set up these annuities, but that the risk is still low.
“Generally speaking, donors still don’t have anything to worry about,” said Bryan Clontz, founder and president of Charitable Solutions, which manages complicated charitable donations. “They have more to worry about today than they did a year ago. But it’s more of an acceleration of a trend.”
What ensures that the annuity payments will be made is the nonprofit itself, and more specifically the unrestricted cash and marketable investments that it has. Just as a commercial annuity is only as good as the solvency of the insurance company that created it, the same holds true with a charitable annuity and the nonprofit organization receiving the gift.
Regulations of nonprofits that offer these annuities vary by state. California, New York and New Jersey are considered the most restrictive, with California requiring nonprofits to establish trusts to hold the annuity money, said Stephanie Buckley, senior regional fiduciary manager for philanthropic services at Wells Fargo Private Bank. That trust ensures that the annuity assets are kept separate from the general assets of the nonprofit.
Most nonprofits are also guided by the American Council on Gift Annuities, which establishes ethical guidelines but also sets the rates that annuities pay. Those rates ensure that the donors will be paid an annuity stream based on actuarial calculations of their age. That rate presumes that about half of the donation will be left for the nonprofit when the donor dies.
A recent survey from Crescendo Associates, which creates software for charities, found that over 80 percent of nonprofits followed the recommended rates.
The other rate that matters is the investment return; the recession has driven those rates down. That could be bad for donors expecting a tax deduction on what is eventually left to the nonprofit because a lower assumed rate of return means more money that needs to be paid back as an annuity and less left over at the end, said Russell James, a professor of personal financial planning at Texas Tech University.