Guidelines for Administering Your Gift Annuity Program
By James B. Potter

It is almost universally and correctly recognized that charitable gift annuities are contracts, not trusts. Clear and detailed administrative rules charitable remainder trusts and pooled income funds are found in the federal Internal Revenue Service Code and its regulations. There is little guidance in the federal tax regulations concerning the administration of gift annuity funds. However, gift annuities are regulated by some states, which require the issuing charity to obtain a special permit to write and accept annuity gifts.

In the 15 years I have assisted charities in establishing or improving their gift annuity programs. I have found many of the same errors repeated time and time again. Here is a list of guidelines addressing the 13 most common gift annuity fund errors and problems I have seen over the years. How many of these apply to your gift annuity program?

1. Understand that gift annuities are regulated by the state, not by the federal government. Charities are responsible to know the regulations of all the states in which they offer gift annuity agreements. At least 22 states regulate gift annuity agreements. Half require the charity to notify them that they are writing gift annuity agreements and the other half require the charity to obtain a permit and administer and invest their annuity fund according to the rules found in various state insurance and/or other regulatory laws. The 11 states (as of 11/2000) that currently regulate annuity gifts by issuing permits, include AR, CA, HI, MD, NJ, NY, ND, OR, TN, WA and WI, with new states being added at an increasing rate in recent years. Go to www.pgresources.com for the "State Regulations Summary Report"
   
   
2. Add the state-required special "disclosure language" wording to annuity agreements written with residents of some 24 states (as of 11/2000), in such states as CA, MD, OR, TX and WA. The three most western states require "reasonable commensurate value" data and other information to be added to the body of each agreement. Both MD and TX require specialized disclaimer wording in an agreement that the donor signs. In almost all cases, the charity must share a copy of the agreement with all the state regulators. If you plan to obtain a permit in any of these states, be sure the required "extra" wording has been included in all agreements in force when you actually file for the permit.
   
   
3. Offer every perspective donor the annuity rate on your annuity rate chart. Have an annuity rate chart for all ages for whom you will accept annuity gifts and never offer a lower gift annuity rate to a perspective donor before advising them of the highest annuity rate available to all annuitants of that same age. After advising the prospect of the highest rate for which they qualify, the charity can suggest that a higher charitable deduction is possible if the donor accepts a lower rate. All regulated states require the charity to submit their gift annuity rate schedule to the regulating agency and to prove the actuarially that the rates offered will actuarially net at least 50 percent of the gift for the charity.
   
   
4. The annuity rates you offer must provide a charitable deduction of at least 10 percent of the value of the assets given. If it is less, the donor and the annuitant lose all tax benefits under federal regulations. For persons of the same age, the higher the annuity rate, the lower that charitable deduction. Watch the monthly changing discount rate used in the computations which lowers the deduction as the discount rate goes down. Don't write a gift annuity agreement unless the deduction calculates at least 10 percent of the initial fair market value of the gift.
   
   
5. Invest the entire gift in the charitable gift annuity fund. Many charities do not realize that the federal calculation of the investment-in-the-contract (fair market value of the gift less the charitable deduction) is less than the amount the state regulators require be held for the required reserves (actuarial value) for each gift. While state regulators ask only about the Required Reserves (actuarial calculation of the life interests in annuity gifts), the charity must be able to prove that at least 50 percent of the gift will actuarially accrue to the charity.
   
   To accomplish this, the income on the invested gift portion (excess reserves)of the annuity gift is needed to produce the annuity payments so that the required 50 percent of the gift will be available to the charity. Investing less than the entire gift may well actuarially produce less than 50 percent of the gift (depending on your actual long-term investment earnings rate used for the computations). This can also place your annuity fund in violation of the requirement that you be able to prove actuarially that at least 50 percent of the gift will accrue to the charity. If you use the American Council on Gift Annuities rates, it is assumed that 100% of the gift is invested. You may have less than 50% of the initial gift, is you invest less than the full gift. (Paying a commission or finders fee for an annuity gift will, among other things, put into jeopardy your ability to prove that the rates you offer will generate at least a 50% remainder.)
   
   
6. Write the annuity agreement for the fair market value of the gift transferred, not the proceeds of the sale of the asset. Admit the security to the fund at its fair market value (average of high and low sales) on the gift date. The gain or loss of the sale of the security is a gain or loss to the fund. The commissions for sale of the stock is an expense of the gift annuity fund.
   
   
7. Round the annual annuity amount upward, so that each periodic annuity payment is exactly the same. Failure to do this makes computerization of your gift annuity fund more difficult. Divide the computed annual annuity amount by the number of periodic payments a year. If the resulting payment amount includes a fraction of a penny, raise the periodic payment amount by one cent and multiply that amount by the number of payments per year to determine the annual annuity amount. (e.g., $10,000 gift @ 9.1 percent = $910. Monthly payments = $75.833. Write agreement for $910.08 a year and $75.84 per month.) Be sure that your computer program automatically handles the math in this manner.
   
   
8. Make payment to annuitants only if you have their social security or tax identification number. Be sure to issue a 1099R form to each annuitant by January 31 each year and send copies to the government by February 28. Failure to file a 1099R form for each annuitant could result in a fine of $50 a year per occurrence. Also, be sure the amount of reportable capital gain is entered on the 1099R Form. This has been required since 1992 and the 1099R Form now provides a space for this information. Make sure you have full calculation records for all your annuity agreements.
   
   
9. Mail the annuity payment check to arrive by the payment due date. Date the check on the payment due date, so it cannot be cashed early. Then get it to the annuitant on time. Failure to do so will result in fewer additional gifts from those same donors, because they will give their additional gifts to those charities that make the payments "on time."
   
   
10. Be able to determine the remainder value of each gift at its termination. Track every annuity gift within the annuity fund or establish a formulae approach so that the charity will be able to identify the amount of the remainder of the gift to be withdrawn from the annuity fund. Since an annuity gift loses its identity once it is admitted to a gift annuity fund, it is important to decide early on, what methodology will be used to track the value of each gift or determine the appropriate market value of the gift that should be removed from the fund at the termination of the agreement. It is important not to wait until your first gift termination to face this issue.
    
    
11. Make sure that the amount of each annuity check is reasonable. Recognize that each annuity check costs money to produce and mail, most likely $3 to $5 each. A monthly payment annuity could cost the charity $36 to $60 a year (or more, if you use an outside bank), in out-of-pocket costs, just to make the payments. Pay most agreements quarterly, semi-annually, or annually. Agree to pay monthly only for gifts of at least $15,000 or more, to ensure that the amount of each check will be large enough to keep the cost of its production and mailing within reason.
    
    
12. Establish policies for the administration of your gift annuity fund. Have your gift annuity policies approved by your board. A starting point in determining the policies to be followed are found in 16 subjects outlined in "Gift Annuity Policies" article found in the May 1993 issue of Planned Giving Today. (See www.pgresources.com)
    
    
13. Limit assets accepted for annuity gifts to cash and publicly traded securities. Be aware that NY state prohibits real estate from being held or admitted to a gift annuity fund. NJ and some other regulated states will not permit real property to be held in the Reserve Account of a Gift Annuity Fund. Administer your gift annuity fund according to the most restrictive rules of the regulated states in which you operate and have or expect to get a permit.
    

If any of the above guidelines address problem areas found in your gift annuity fund, you will want to review the administration of your gift annuity fund and program. Gift annuities are relatively easy to administer if you understand what rules need to be understood and followed. A gift annuity development program can be an effective method of raising funds for your institution, while providing increased financial security for the donor/annuitants who avail themselves of your annuity program.