Charitable Gift Annuity Administration

ADMINISTERING YOUR GIFT ANNUITY FUND FROM "A" TO "Z"

Presented at the 24th Conference on Gift Annuities
April 26-28, 2000
Adams Mark Hotel, St. Louis, Missouri

By James B. Potter
Consultant, Planned Giving Resources, Inc.

Perhaps you have been told that you learn best from your mistakes rather than your successes. It would be my hope that I can share enough of what I have learned over the years, through both developing and administrating thousands of annuity gifts and more than 30 gift annuity funds from start-ups to many tens of millions of dollars in size, that I can simplify your education in Gift Annuity Fund Administration, and save you from learning some important lessons the hard way.

Administrating your gift annuity fund is not really difficult. While much of it is common sense, your lack of knowledge in some areas could cause pitfalls for your organization without your realizing their possible ramifications.Gift annuity funds are regulated by the Insurance Department of the ten states whose statutes require the charity to obtain a Permit or Certificate of Authority to offer gift annuity agreements to residents of their states. (See also the "Report On State Regulations", made to the Conference on Gift Annuities in April, 2000.)

While time does not permit me to share with you everything you will need to know on this subject, I will attempt to cover enough subjects, that, hopefully, every participant here will learn at least a couple of new facts, regardless how much experience you may have with Gift Annuity funds. If you are relatively new to the subject, or are just now considering starting a Gift Annuity Fund, this workshop will dramatically shorten your learning curve. I am unaware of any published source that covers many of these subjects. While we have listed some 40 items in total, we have grouped most of them by subject categories and have labeled them from "A" to "Z", and numbered the balance for a baker's dozen plus one, for easy reference. There are multiple points listed in some of the 40 subjects covered. So let's get started.

Investing the Annuity Gift

a) Invest the entire gift, not just the "Required Legal Reserve" Portion of it. The maximum suggested rates of the Committee on Gift Annuities assumes the investment of the entire gift. Even then, you should expect to net 50% of the gift, on average, unless you can invest your fund to earn more than 6.0%. If you spend the Gift Portion before the demise of the last annuitant in the agreement, you run a real risk of having insufficient assets to make the required annuity payments. The income on the invested Gift Portion as well as the Reserve Portion is necessary to make the annuity payments.

b) No state regulations speak to investing the Gift Portion of your Annuity Fund. To make the assumed investment return of 6% on your gift annuity fund, you will need to invest the Gift Portion or Excess Reserve Account (the portion of your fund that is NOT the Required Legal Reserve) in growth equity investments and be fairly aggressive with this part (25-35%) of your Fund. But, you should also know and follow the investment rules of the regulated states for the Reserve Portion of your Annuity Fund. Consider following those in the State of New York Insurance Law No. 1110 (the strictest state law that regulates Gift Annuity Funds by statute).

To avoid the long list of investment restrictions in the NY State Insurance Law, invest the Reserve Portion of your Fund solely in Federal Government obligations (Treasury Bills, Notes, Bonds,). While money market funds can be an important part of your investment mix, to permit liquidity in providing a source for making payments without selling bonds, before maturity, they are also viewed as mutual funds, which have restrictions in NY. Invest no more than 5% of the Reserve Account of your Annuity Fund in any one mutual fund, even money market funds. If you determine that, say, 15% of your Fund should be invested in money market funds, to provide sufficient cash flow for making annuity payments, etc., find three appropriate money market funds and invest up to 5% of the Reserve Account of your Annuity Fund in each one. Avoid money market funds with "L.P." (Limited Partnership) in their name.

Making Annuity Payments

c) For ease of administration and eventual computerization, make every payment other than the first one, the same, even if rounding annual amounts upwards by a few cents to accomplish this. Always round up, never down.

i.e.: $5,000 x 9.1% - $455.00 a year, payable monthly - $ 37.917 a month.
       $37.92 x 12 - $455.04 a year. Write agreement for $455.04 a year.

Be sure that your planned giving tax calculation software is set to round each payment upward to the next penny (some programs can be set to do this or not), so that your periodic payment, when multiplied by the number of payments in the year will agree with the annual annuity amount calculated by your software. Test your software with a problem like the one shown above and make sure that 12 monthly payments calculate at $37.92 each and total an annual annuity of $455.04 and not some lesser amount.

d) Mail payments to ARRIVE on payment due date. Do NOT mail on payment date. Mail checks from 1 to 7 days prior to payment due date, depending on distance from your office to the annuitant's address. This builds donor / annuitant good will and improves chances of obtaining another gift. Never miss a payment. Your Development Office should the control payment handling, not your Business or Accounting Office. Which office do you think will be more interested or affected should a payment be late or missed? Count each payment as an important opportunity for a donor cultivation contact. Use your organization's check forms, and be sure that the name of your organization and "Gift Annuity Fund" are prominently displayed on the face of the check, not the name of your bank or insurance company. Send a personalized letter with each payment. Make it count as a development contact, not just a legal obligation. It will increase the number of your additional annuity gifts.

e) Date your annuity checks on the payment due date, so they cannot be cashed sooner and advise annuitant of that fact when you start to send payments. Do not date them the date you print the check, so you can mail then a few days early to arrive on the payment due date.

f) If annuitant dies on the payment date, the payment belongs to the annuitant.

g) If annuitant dies just prior to payment date and the annuity payment has been mailed, the Insurance Commissioners of regulated states will require charity to make a "reasonable effort" to obtain a refund of the payment from the estate. It is a legitimate claim against the estate. Make no less than three (3) documented efforts to obtain a refund from the annuitant's estate. If necessary, send executor a copy of agreement and send final request by Certified Mail, Return Receipt Requested.

h) Make every effort to locate a lost or missing annuitant who moves and does not advise you of their new address. If your checks/letters are returned, marked with "forwarding privileges expired" or 'forwarding address unknown" etc., send a letter to Postmaster of last known town. Enclose a check for $3.00, payable to "Postmaster," with a letter to the Postmaster requesting annuitant's new address under the Federal "Freedom of Information Act". If it is known, they must supply it to you.

If still unknown, you can write a letter to addressee (the annuitant), advising that you need their new address to fulfill your annuity payer obligations. Place in an outgoing envelope bearing only their name in address location. Do not seal envelope and send to Social Security Administration, Washington, D.C. with a letter providing Social Security Number of Payee and requesting that if annuitant is alive, that they forward your unaddressed/unsealed envelope to the annuitant/addressee. Social Security Administration does not charge for this service.

Reporting Annuity Payments

i) Charity must report taxable annuity payment amounts (paid in prior calendar year) by January 31 each year to ALL annuitants, (using the 1099R Form, for 1991 and later payments; for 1990 and earlier, it was a W2-P Form), regardless of amount paid (not just those receiving $600.00 or more annually). This was a former requirement not followed since the early 1990s. Report the information (using copy of 1099R Forms and cover Form 1096) to IRS through the Social Security Administration, by February 28 each year. Payment data to more than 250 persons, (total of annuitants and employees of charity), are to be reported electronically, not with paper forms. The IRS can advise how to do this.

j) Provide the annual Capital Gains reporting amount to donor/annuitant that may be reported ratably over donor's lifetime, using space provided on Form 1099R. This has been mandatory since annuity income reported for 1992 (reported 1-31-1993). Maintain ongoing records of all data you have reported annually to each annuitant. Also, maintain records of recurring multiple addressees, like a summer home, and know which annuity checks should be mailed to each. Be aware that a Post Office Notice of a new address could be just a temporary one, not a permanent change. Post Office never identifies one from the other. Consider establishing Direct Deposit for those annuitant's that want it, or offer to send checks direct to annuitant's bank for deposit in their account. Send a "Notice of Deposit" to the annuitant's home to advise that payment has been made, as a courtesy to the annuitant.

k) Provide donor and annuitant with appropriate tax reporting data (charitable deduction, capital gains, tax-free and taxable annuity payments for all years of their life expectancy at the same time gift annuity agreement is established. Do it in chart form by groups of years, so annuitant may prepare their annual tax return without waiting to get your 1099R Form.

Drafting Agreements

l) Be sure to have the donor sign the Gift Annuity Agreement. It is a contract, not a trust, and needs to be signed by both parties to the contract, the charity and donor(s). Some 22 states presently require state mandated Disclosure Statement language (or other specific language unique to each state) either in the agreement or in a document signed by the donor, and kept on file for the life of the annuity agreement. All states that require a Disclosure Document allow the state mandated wording to be placed in the agreement, as long as it is in separate paragraph in type no smaller than that used in the rest of the annuity agreement. Some states even require such wording to start on the first page of the agreement.

m) The gift annuity agreement may only say the gift is for ". . . the general use" of the charity. Do not describe any restrictions or designations for use of remainder (residuum) of the gift in the Gift Annuity Agreement.

n) If remainder of annuity gift is for a designated or restricted purpose of the charity, create a separate Special Agreement that takes effect at the death of the last annuitant (termination of the Gift Annuity Agreement). Describe any restrictions on the use if the residuum of the gift (including investment and use of only the income) in the Special Agreement. This could be done with a letter, but will mean more to a donor (because they perceive it as being more legally binding) if incorporated into a Special Agreement. Have donor sign (approve the terms of) the Special Agreement before charity's officers sign it. If charity executes agreement first, problems will develop if donor fails to return a signed copy to the charity promptly. Never start making payments until a signed agreement is in place.

o) Always provide secondary wording in Special Agreement to provide for final use of gift, if donor's first or other choices for designation cannot be met. If necessary, provide for several alternatives in sequence, but always end with a use that will permit gift or the income from its investment to be used as determined by the charity's Board. Never leave the final terms so restrictive, that gift or its income cannot be used, if the donor's designation is no longer part of the charity's program some 100 years from now.

p) Type multiple original copies of all Gift Annuity and Special Agreements for all donors, annuitants and charity. Include separate copies for annuitants who are not donors. Identify in body of agreements the number of original copies prepared, describing each as an original. Allow donors to decide if they wish to give other annuitants a copy of gift annuity agreement or let charity do it. Charity should NOT send a copy of Gift Annuity agreement directly to a successor annuitant, if donor's "right to revoke" wording is included in agreements. Send copies of Special Agreements ONLY to donors, not to annuitants who are not also donors.

Withdrawing Gift from Fund

q) Determine your Gift Annuity Fund Withdrawal policy before first termination (death of last annuitant to an agreement). Be sure your policy will withstand scrutiny for accuracy and appropriateness of amount to be withdrawn. State Insurance Law only speak of amount of legal reserve required to be held to cover annuitants who are alive at end of each year. There is no guidance on deciding how much to withdraw from the fund at termination of an agreement. (See Exhibit 2 and Exhibit 6.)

Reinsurance of Gift Annuity Obligations

r) Determine charity's policy on reinsurance of gift annuity payment obligations before embarking on Gift Annuity program. If charity is domiciled in New York or has annuitants residing in New York, and may opt someday to file for a Permit to write gift annuities in New York, be aware of New York State's Insurance Commissioner's view of what constitutes legal "reinsurance" of the annuity obligation in that state. Their view applies to total Annuity Fund, not just the NY State agreements. (See Exhibit 3.)

Filing for Permits in Regulated States

s) Be aware that if your charity is domiciled or has offices, OR has annuitants in any of those ten states that regulate Gift Annuity Agreements and Gift Annuity Funds by State Statute (AR, CA, HI, MD, NJ, NY, ND, OR, WA, and WI), you need to investigate the need for complying with those applicable statutes. It is not an "either or" situation, it is BOTH. Charity's location AND annuitant's residence governs the need for compliance of these state statutes. The issuance of Gift Annuity agreements is a state regulated industry. If you have a legal opinion that indicates you need only comply with the state laws of your own state, you need to obtain a second opinion pronto. Do you think that a ommercial insurance company can do business in any state outside of its own because it handles everything by mail and has no sales force in the annuitant's state? With the National Association of Insurance Commissioners (NAIC) suggested uniform regulatory language to all 50 state legislatures in January 1999, the days of a charity being able to claim it did not know it was in violation of a state's gift annuity regulations is fast coming to an end.

If you have annuitants living in any of those ten (10) states, or in any of the ten other states that require you to "notify" then that you are issuing gift annuity agreements to their residents, it would be wise to administer your Fund as if you planned to file (even if you don't), in the strictest state (NY) tomorrow. This will help minimize the time you will need to make the changes necessary in your fund administration to comply with the appropriate state insurance statutes (if you later decide to file for a Permit) and will minimize the time your fund will be prevented from accepting new gifts while you get your fund into legal compliance. This could be a problem for 3 to 6 months or even longer, during which time you will be prevented (by the regulating state) from accepting any new annuity gifts in that state.

You should be aware that if you are dealing with NY, and if you reinsured any of your annuity obligations, you will not be able to comply with the NY law unless you add sufficient new assets to your Annuity Fund to cover the Required Legal Reserve amounts of the "reinsured" annuities (possibly from 60 - 75% of the face value of the reinsured agreements) unless you used a "treaty" agreement with the insurance company. Your non-treaty type reinsurance policies will not qualify as Admitted Assets in your Gift Annuity Fund.

t) Whether you plan to file for a Permit or Certificate in any of the ten states regulated by statute or not (AR, CA, HI, MD, NJ, NY, ND, OR, WA, and WI), be aware of the rules for investing, wording in agreements, etc., in each state's Insurance Law. Without identifying your organization to the state regulators, have your legal counsel or planned giving consultant obtain a copy of the appropriate section of each state's Insurance Law, together with filing forms, etc., and become aware with what is involved with complying in each of those states. See the present status of the State Regulations of Gift Annuities here on our web site. Check that source regularly for updates. See the "New Information" for changes since your last visit.

u) To register or not with any of the Insurance Commissioners of the ten (10) states that regulate annuities by issuing permits, is a legal and ethical decision that each charity must make only after reviewing all of the facts on a state by state basis and obtaining advice from your charity's own legal counsel. Rather than contacting regulators directly, Network with other non-profits or have your outside legal counsel or planned giving consultant deal with the state regulators until you are ready to file for a permit in that state.

v) Before filing for a Permit, be sure your Fund will qualify to receive it. Once you have filed, you will be advised of what (if anything) needs correction and at the same time, you may be told to stop accepting new annuity gifts until you have the permit in hand. This might take from 3 to 6 months or even far longer, so expect to be "out of business" to new gifts from that state during this period. Therefore, don't file for a permit with any state regulator until you are reasonably sure you will obtain it. Work with an attorney or advisor who has direct experience in this area (See Exhibit 4).

w) Most regulated states (not NY) allow the reinsurance of the annuity payment obligation that is above the initial $100,000 Required Legal Reserve amount (about $150,000 in face value annuity agreements). Since you must obtain the minimum $100,000 Fund and file an annual report in most regulated states, it becomes a question of whether there is a benefit of reinsuring agreements above that minimum.

x) After you obtain your permit(s), be sure your administrative, legal and/or accounting staffs are prepared to handle the annual state reporting requirements or obtain help from qualified professionals who have experience in annual reporting to the Insurance Departments of these regulated states.

y) Be prepared to compute the actuarial value of each agreement annually, or obtain actuarial or other professional help in computing this data. Charity must report Required Legal Reserve data for all agreements in your Annuity Fund, based on formulas, annual annuity amounts, ages of annuitants, actuarial tables and interest rates approved by each regulated state in which you hold a permit or certificate. Each state's rules are different. (See Exhibit 5 for sample of NY State Report).

Gift Annuity Records

z) Maintain detailed records of each annuity agreement, each gift and the ongoing periodic earnings, investment and market value data for your Annuity Fund, so that periodic analysis of both gifts and your fund can be made for your management staff, your Board and if necessary, the state regulators. Do NOT assume that your business/accounting office has this well in hand. Unless you specifically establish a means to track its changing value, each annuity gift looses its identity once its admitted to your Fund. You will not know how much to withdraw from your Fund when the agreement terminates.

Because your Annuity Fund is a dynamic, constantly moving target, with gifts moving in and out of the Fund, invested assets with changing market values, income being earned and expenses being incurred at different rates, a withdrawal policy that removes an inappropriate fund balance at the termination of an agreement, etc., is easy to accomplish. It is possible to be in trouble with the values in your Annuity Fund for a considerable time before you become aware of it, if you ever do. The bigger and more active the Fund, the more likely this will be.

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A Baker's Dozen

It is important to establish a means to track each gift within your Fund early on, so you won't be caught unaware with problems that either you cause or inherit. Do NOT assume that others have established appropriate rules or policies under which your Gift Annuity Fund operates. Do NOT assume that your business or accounting office knows how to administer your annuity fund. It is unlike any other fund they handle.

Correctly handled, a Gift Annuity Fund can be an important vehicle for long range funds development for your charity's future programs. For both small and large donors alike, it can be a vital tool to provide high income to older donors that is not possible through other gift plans.

A Baker's Dozen (Plus One) of More Ideas

1) Knowledge: Be sure someone in your Development Office knows all about gift annuities and gift annuity funds, or that you have access to someone who does. Do not rely on your Business Office. Your organization is responsible once it starts to accept annuity gifts, even if it reinsures its annuity obligations with a commercial insurance company. Be aware that if the insurance company goes bankrupt, the charity that issued the agreement is still responsible for the payments.

2) Stopping Payments: Unlike separately invested charitable remainder annuity trusts or unitrusts, where the trust ceases once all the trust's principal assets have been expanded, a gift annuity agreement is a contract, not dependent on the income earned by investment of the gift. All annuity payments must continue as long as the charity itself has any assets. Bankruptcy is the only legal way a charity can get out of its contractual obligation to make the annuity payments on the agreements it has issued.

3) Gift Tax Return: When giving the donor the tax information about the annuity gift, also advise the annuity gift donor about the need to file a federal Gift Tax Return (Form 709) as an informational return, for the charitable deduction amount is a reportable but not a taxable gift.

4) How to File Form 709: Advise donor to attach a photo copy of agreement and tax computation sheets to Gift Tax Return and attach a copy of the Form 709 and its attachments to his/her 1040 Federal Income Tax Return in the first year donor reports the gift. This identifies the donor as a "full disclosure" taxpayer and makes their tax return less likely to be audited, solely due to their reporting a large charitable deduction for the annuity gift.

5) AFR and tax consequences: Advise donor of need to also attach statement to their Tax Return if the AFR (Applicable Federal Rate) or CMFR (Charitable Midterm Federal Rate) they choose to use in the charitable deduction calculation for the gift annuity is from or two months prior to the gift month, rather than the month of the gift. Also, advise them that failure to attach that statement, will disallow the use of the AFR rate and for any month other than the current month of the gift. The higher the AFR rate, the larger the charitable deduction.

6) Additional wording: Be sure any additional wording required by state insurance statutes is placed in any gift annuity agreement where charity is domiciled in, and/or annuitant lives in any of the regulated states (i.e.: CA, NY, OR, WA and 18 other states) that requires additional specialized wording, such as: agreement number, the actuarial age of the annuitant(s), reasonably commensurate value, and state mandated disclosure language, etc. See our web site at www.pgresources.com for details.

7) Annuity Rates: Be sure that your Board and staff understands that the Suggested Maximum Annuity Rates of the Committee on Gift Annuities are based on the assumption that the charity will, on average, net only 50% of the gift, and that the Gift Annuity Fund need only earn a total return of 5.5% a year on average (See Exhibit 1).

8) State Regulations: For a summary of the State regulations on Gift Annuity Funds and contacts within the State Insurance Departments for the ten states that regulate annuities by issuing permits, click here for our State Regulations Summary - a 6 page report for all 50 states.

Federal vs. State Data: The Contribution Deduction and the Investment-in-the-Contract are the federal calculation equivalents of the state calculations of the Gift Portion and the Reserve Portion of the gift. The state calculation for the Reserve Portion for any annuity gift is always LARGER than the federally computed Investment-in-the-Contract. The federal calculations for the Contribution deduction are more liberal (larger) than the state computations for the Gift Portion, even though the same actuarial table (1983 "a" Table) is used in both computations, the formulas and interest rates are used different.

9) Investing: Use a "buy and hold' approach to investing the Reserve Portion of your Annuity Fund in Treasury Bills, Notes and Bonds. The maturity dates of the fixed income obligations should be chosen with some sensitivity to the life expectancy of the annuitant(s), the need to have some asset in the Fund mature every few months, and a portion of the Fund (say 15 - 20%) invested in Federal Government Money Market funds (a maximum of 5% of the Reserve of Fund in any one mutual fund). Arrange for each mutual fund to have its income reinvested back into itself.

10) Checking Account: Establish a separate checking account just for your Gift Annuity Fund. The checking account, the mutual funds and other investments constitute your Segregated Gift Annuity Fund. Obtain check writing privileges for each Money Market Mutual Fund, so you can write check(s) for the amounts needed to cover the annuity payments for the month. Deposit the checks into the Gift Annuity checking account to cover the annuity checks issued that month. Deposit the interest and dividend income checks from the invested assets in the checking account.

11) Investing Each Gift: As each new gift is received or as each fixed income obligation matures, make a decision on how much should be invested in the money market funds and how much in longer term fixed income obligations. You want to avoid having to sell a bond, bill or note before it matures. Therefore, review the maturity dates of the investments in your gift annuity fund every time you have proceeds to invest and you need to make a new investment decision.

12) Gift File Records: Be sure you have a copy of the tax calculations of each annuity gift, not only in the Donor and annuitant file, but in a separate file which contain a copy of each set of tax calculations for donors/annuitant in your Fund. There will be times when you will be thankful you maintained that separate file, so you won't have to find the donor file for each and every gift. I have been thankful many times that I established such a file as a backup source of tax and payment data for each gift.

13) Join ACGA: And finally, join the Conference on Gift Annuities. As a supporter of the American Council on Gift Annuities, you or your organization will have access to information on the Gift Annuity, Deferred Payment Gift Annuity and Pooled Income Fund. In addition you get access to the latest information on gift annuity rates and access to copies of 350 plus page printed proceedings of the most recent Conference and the ability to network with other Conference members who might help you resolve any gift annuity oir planned giving problem you may have. All this and the largest biennial planned giving conference in the nation, for just $75.00 a year!

And there you have 40 subjects relating to the correct administration of a Charitable Gift Annuity Fund. While it is not rocket science, it is very detailed, and any one of these subjects, if incorrectly handled, could cause you serious problems at some point in time. I suggest that those charged with the administration of your gift Annuity Fund read and reread this paper from time to time. It is surprising how much you will find that you did not see before when you review this from time to time. New staff members should be given their own copy as well. And while networking with charities experienced in this field is helpful and to be encouraged, do not assume that just because you are networking with either a large or experienced charity, that they must be doing it right. That is not a given.

If you become a student of Gift Annuity Administration, you will be able to use this gift plan with success in an overall planned giving development program. If correctly handled, your organization should be able to realize as a remainder of your annuity gifts, at least fifty percent of the value of the total annuity gifts that you receive over time.

James B. Potter, Planned Gift Consultant, Planned Giving Resources, Inc.,
PO Box 8300, Alexandria, VA 22306
E-mail: jimbpotter@aol.com   Web site: www.pgresources.com Phone: (703) 799-8300

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EXHIBIT 1

How Gift Annuity Rates Are Computed
by the
American Council on Gift Annuities
(Formally the Committee on Gift Annuities)

The state laws of 11 states that regulate charitable gift annuities by statute ALL stipulate that the Annuity rates offered by any charity must be proven actuarially to net the charity at least 50% of the original gift.

If part of the gift principal is withdrawn before the demise of the annuitant, thew charity will not be able to prove that 50% or more of the gift will accrue to the charity (if Committee on Gift Annuity rates will be utilized).

Source: Printed Proceedings of 1977 Conference on Gift Annuities
(with explanatory notes by James Potter).
(c) copyright James B. Potter, 1994-2000 

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EXHIBIT 2

Determining Remainder Amount at Death of Annuitant

An Annuity Gift looses its identity upon its admission to a Gift Annuity Fund. There are at least two ways that charities determine how much to withdraw from the Annuity Fund at the termination of any particular contract.

1. Charity could administer the Annuity Fund as if it were a pooled Income Fund, by utilizing the fund and assigning units (shares) to each gift based on the units in the fund and the market value of the fund on the date each gift is admitted to the Fund. This method costs more than other methods administratively, but is extremely accurate.

2. The charity would maintain fund records by determining the net income of the fund each year as a percent of the total face (book) value of the annuity agreements in the Fund (see Exhibit 6).

Then at the death of the annuitant, make the following calculations:

1)  Start with market value of gift (net proceeds) of gift.
2)  Add income for the number of days gift was in Fund for first year.
3)  Subtract annuity payments for the first partial year.
4)  Determine book value balance of gift in fund.
5)  Add income and subtract payments for each full year gift is in Fund.
6)  Follow steps 2 and 3 for final partial year.
7)  Adjust new balance by percentage of face (book) value of agreements in Fund to its market value and remove only the revised adjusted book value which is adjusted to its proportionate share of market value.

Example of Terminated Gift Annuity using Method No. 2
Gift:                    $ 10,000 Annuity Rate:        8.5% Gift Date:            6-30-88 Date Died:          3-30-91			Income Rate: 1988 - 6.75% 1989 - 7.10 1990 - 7.25
Steps			Balance Totals
1	Original Gift	10,000	10,000
2	Income 1st Yr	+ 337
3-4	Less Payments	- 425	9,912
				Adjustment of Book to Market Fund Book Value: 1,250,000 Fund Market Value: 900,000 Market to Book       72%
5	1989 Income	+ 704
5-4	1989 Payments	- 850	9,766
5	1990 Income	+ 708
5-4	1990 Payments	- 850	9,624
6	1991 Income	+ 156
6-4	1991 Payments	- 212	9,568
7	72% of 9,568		6,889	(Market Value to be Withdrawn)

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EXHIBIT 3

Reinsurance of Gift Annuity Agreements 

Many conservative Boards of non-profits assume that by reinsuring their annuity agreements with annuity contracts issued by commercial insurance companies licensed to do business in the domiciled state of the charity, they are protected them from any future liability. This is simply not true.

1. If the charity purchases a single premium "refund Type' policy, it pays a single premium [generally from 60 - 75% of the total gift, depending on the age(s) of the annuitant(s)] and receives periodic annuity payments from the insurance company for the life of the annuitant(s).

2. At the end of the life expectancy of the annuitant(s), the single premium amount paid by the charity will have been returned to the charity in the form of annuity payments. Further payments will be the insurance company's money.

3. If annuitant dies before his/her normal life expectancy, insurance company will either refund the balance of the premium paid, or, more likely, will continue to make the annuity payments to the charity until the premium amount paid has been returned to the charity.

4. The charity loses its use of the income of the investment of the premium paid, but it gains the payments above and beyond the premium paid if annuitant lives that long.

5. If insurance company goes bankrupt, the charity still owes annuity payments.

6. Reinsurance of annuity agreements by charity with commercial insurance company in New York State is acceptable (to NY State Dept. of Insurance) only if using a "treaty agreement" (terms negotiated between charity and insurance company). See the State Regulations Report in the printed proceedings of 20th Conference on Gift Annuities (1989) , Toronto, Canada. Obtain from CGA office, Dallas, TX.

7. Charity can realize more money from annuity program by being a "self insurer", investing the entire annuity gift for life of the annuitant(s) and investing the assets of their Gift Annuity Fund conservatively in assets acceptable to the Insurance Commissioners of the regulated states. Maintain the Required Legal Reserve portion of Fund in U.S. Government obligations (Treasury Bills, Notes and Bonds), and no more than 5% of the Fund in any one mutual fund. Follow investment rules found in New York (most restrictive) Law. Fund need only earn 6.5% of book (total gifts) value of fund to net 50% of the amount of the gifts received for the benefit of the charity.

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EXHIBIT 4

Sample Gift Annuity Agreements for Regulated States Requiring Permits

List of six (6) sample gift annuity agreements to be filed with Insurance Commissioner's Office when filing for a Special Permit or Certificate of Authority, to write gift annuity agreements in the states of AR, CA, HI, MD, NJ, NY, ND, OR, WA or WI.

1. One Life, Immediate Payment

2. Two Lives, Immediate Payment, Successive Annuitants

3. Two Lives, Immediate Payment, Joint and Survivor Annuitants

4. One Life, Deferred Payment

5. Two Lives, Deferred Payment, Successive Annuitants

6. Two Lives, Deferred Payment, Joint and Survivor Annuitants

Variable Wording or Special Information to be Included:

1. Two lives: the right of Donor to Revoke by Will, the right of survivor annuitant to receive payment after death of donor.

2. Payments are non-assignable if gift funded with appreciated property.

3. Market value of gift, if funded with other than cash.

4. Agreement governed by laws of (state of domicile of charity or domicile state of annuitants, if annuitant state regulates by issuing a permit). Regulations of more stringent state governs on any issue, if both states claim jurisdiction.

5. Each agreement numbered for control (required in state of Washington).

6. Reasonably Commensurate Value written into body of Agreement (CA, OR and WA).

7. Corrective action wording if age of annuitant is discovered to be wrong.

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EXHIBIT 5

Interest Rate: 6.%
12/28/1990 quar def 1st paym 09/30/2016			$10,000.00	$ 1,820.00	6.01132391	$  10,940.61
Melinda Jones   F 51 09/03/1948
Christopher Jones M 21 11/30/1978
12/19/1995 quar 1st paym 12/31/1995			$500,395.00	$40,031.60	5.36591942	$214,806.34
Ruth Smith      F 86 09/14/1913
			---------------	---------------		---------------
Totals for 6.% Interest:			$510,395.00	$41,851.60		$225,746.95
Reserve amounts on this page above recognize modal periods

Interest Rate: 6.%
12/24/1985 ann 1st paym 12/31/1985			$150,000.00	$11,400.00	6.23296936	$71,055.85
Carol Johnson F 83 03/13/1917
12/15/1986 ann 1st paym 12/31/1986			$10,000.00	$770.00	6.54100057	$ 5,036.57
Loretta Samuelson F 82 02/11/1918
			---------------	---------------		---------------
Totals for 6.% Interest:			$160,000.00	$12,170.00		$76,092.42
Reserve amounts on this page use mean reserve factors
	Grand Totals:		$670,395.00	$54,021.60		$301,839.37
Number of Contracts: 4
Calculated using PG Calc's Gift Annuity Organizer v.3.1 Release date: 12/97

(c) Copyright 2000 James B. Potter All Rights Reserved

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EXHIBIT 6

Computing Net Annual Income Rate of Gift Annuity Fund for Year (19xx)

XYZ Charity
Address, City, State, Zip

1. MONTHLY NET INCOME COMPUTATION

(a)	(b)	(c)	(d)	(e)	(f)
Month (19xx)	Administrative Expenses	Misc. Expenses	Total Expenses	Gross Income Earned	Net Income Earned (e) - (d)
Jan	$ 311.27	$0.00	$ 311.27	$ 3,995.64	$3,684.37
Feb		25.00	25.00	3,772.39	3,747.39
Mar		13.00	13.00	4,315.83	4,302.83
Apr	305.03	13.00	318.03	3,941.40	3,623.40
May		5.00	5.00	4,209.73	4,204.73
Jun		5.00	5.00	4,132.21	4,127.21
Jul	276.91	0.00	276.91	4,302.47	4,025.56
Aug		8.00	8.00	4,226.54	4,218.54
Sep		5.00	5.00	3,707.67	3,702.67
Oct	280.78	5.00	285.78	3,686.75	3,400.97
Nov		5.00	5.00	3,518.87	3,513.87
Dec		5.00	5.00	3,550.23	3,545.23

2. AVERAGE INCOME RATE

(g)	(h)	(i)	(j)	(k)	(l)	(m)
	Periodically Revised * Book (Origiinal Gift) Values (NOT Fund Market Value)				Average Net Income Rate
Month (19xx)	Start	End	Average	(f)	Monthly (k) / (j)	Annual (l) x 12
Jan	615,615.06	619,850.73	617,732.90	3,684.37	.0059643	7.1572%
Feb	619,850.73	660,388.15	640,119.44	3,747.39	.0058542	7.0251
Mar	660,388.15	662,552.64	661,470.40	4,302.83	.0065049	7.8059
Apr	662,552.64	660,866.49	661,694.57	3,623.40	.0054759	6.5711
May	660,866.49	661,904.47	661,385.48	4,204.73	.0063575	7.6289
Jun	661,904.47	674,760.66	668,332.57	4,127.21	.0061754	7.4105
Jul	674,760.66	673,263.70	674,012.18	4,025.56	.0059725	7.1670
Aug	673,263.70	669,885.72	671,574.24	4,218.54	.0062816	7.5379
Sep	669,885.72	580,360.76	625,123.24	3,702.67	.0059231	7.1077
Oct	580,360.76	584,580.87	582,470.82	3,400.97	.0058389	7.0066
Nov	584,580.87	592,671.32	588,626.10	3,513.87	.0059696	7.1635
Dec	592,671.32	611,832.56	602,251.94	3,545.23	.0058866	7.0640
		Average:	637,899.49			7.2263%
		Total		46,096.77

Notes:   * Monthly changing Fund Book Value: Total invested proceeds of gifts, plus income, less expenses, payments and withdrawn principal - net book value.

** Total Net Income divided by Average Monthly Book Value - Average Annual Income Rate
($ 46,096.77 / $637,899.46 = .072263).

(c) Copyright 2000 James B. Potter All Rights Reserved

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