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New CGAs Target A Different Level Of Donors

Some of the nation’s largest nonprofits are reporting fewer charitable gift annuities (CGA) in recent years amid historically low interest rates, but the CGAs they do receive are larger than in the past.

“It was a huge part of our income stream, probably until 10 years ago even, and it has declined year in and year out,” said Simon Barnes, executive vice president of development, marketing and research for American Bible Society (ABS) in New York City. The society offers a unique value proposition, according to Barnes: “No one can claim the length of annuities we’ve got,” processing its first gift annuities in 1843.

The trifecta of poor interest rates, an increasingly crowded market and an old financial instrument has “hit virtually everyone’s annuity program,” said Barnes. The challenge for a small annuity is the cost to administer, including communication, accounting and other back-office operations. “It’s an expensive proposition,” he said.

The threshold at which annuities become economical for nonprofits also increased, said Barnes. Five years ago, a $1,000 annuity was acceptable but now anything less than $5,000 might be too expensive to administer, and is becoming more of a vehicle for major donors, said Barnes. “Someone retired generally doesn’t have $5,000 to give away and invest, that money is much more important to them now than even five or 10 years ago,” said Barnes.

Annuities will make up about 5 percent of American Bible Society’s planned giving revenue. “It’s very important to us. We’re not going to give it up. But until rates change, we recognize that it’s a very tricky proposition,” he said. “Because of our history and unique role in the annuity market, we do continue to have a strong annuity marketing program. But we recognize that it’s going to take 20 annuities to equal one decent bequest,” said Barnes.

Last year, ABS reported doing about 65 annuities, compared with 158 five years ago, and 324 a decade ago. The size of its annuities has grown but the number of them has declined, though that average is skewed some because of an experiment to try $100 annuities about 15 years ago. The idea was to get people on board for $100 and increase that over the years, according to Barnes.

Gift annuities are typically marketed to people who are lower-level donors, said Rick Downey, planned giving director at Mercy Corps in Portland, Ore., since people with higher income don’t necessarily need annuities to supplement their income, which makes them better targets for other types of giving. For planned giving and annuities, Downey said a frequent donor, who has given over the years is a typical target regardless of gift amount.

CGAs have been in existence for about 10 years at Mercy Corps, which has about 250 members in its Giron Legacy Society. The society is named for Oscar “Tito” Giron, a charismatic Guatemalan pediatrician who established a village health program in Honduras but was murdered amid political unrest in that country.

Mercy Corps has a minimum of $25,000 for annuities, which he said is not unusual. The American Red Cross (ARC) in Washington, D.C., had its largest gift annuity ($3.5 million) and is doing more large gifts lately, according to Rebecca Locke, executive director, gift planning. “Prior to almost 24 months ago, we were happy or pleasantly surprised when we’d get a $50,000 annuity in; the last several years were dreadful for charitable gift annuities,” said Locke.

She pointed to late 2010 as the time the CGA market seemed to turn the corner, seeing a pace that began to look “like normal in the old days,” said Locke. “It just never slowed down,” she said, adding that the typical annuity to ARC has now crept back toward $50,000 and $100,000, from $20,000 to $25,000 a few years ago.

During the calendar year 2011, the ARC had approximately 170 annuities. During the heyday of annuities in the late 1990s and early 2000s, the ARC was doing 250 a year. The significant drop in the numbers of gift annuities started in about 2005 or 2006, Locke said, but saw a precipitous drop in 2008. “It’s been coming back every year since,” she said.

Charitable trusts have been flat for some time but higher tax rates for income and capital gains on the wealthy might increase their attractiveness this year, said Barlow Mann, chief operating officer for The Sharpe Group, a consultancy in Memphis, Tenn., adding that Charitable Lead Trusts have been the fastest growing type of charitable trusts.

CGAs are a nice alternative for donors who are looking at very low interest rates from their bank when their Certificates of Deposit (CD) mature, according to Robert Wahlers, senior director of development and gift planning, Meridian Health Affiliate Foundations in Neptune, N.J. CD rates are running less than 1 percent for a 1-year CD at most banks while depending on a donor’s age, they could qualify for a rate of between 4.5 percent for a 62-year-old and 9 percent for a 92-year-old with a CGA, he said.

“In a low interest-rate environment, the discount rate is also typically low. When the discount rate is low, it causes the charitable deduction for funding a gift annuity to be low,” said Wahlers, with rates set by the American Council on Gift Annuities (ACGA). “For donors who are both seeking more income and a large income tax deduction, a charitable remainder trust might be a better option. It is important to understand the goals and objectives of the donor, preferably in collaboration with the donor’s advisors, before selecting a charitable giving vehicle,” he said.

During a low interest rate environment, when the discount rate is low, the donor can have less go to charity and more to family, actually getting more assets to family after-tax by making a charitable gift than by not making a charitable gift, according to Wahlers.

Though interest rates are low, everything is relative, said Downey, who started the planned giving program at Fred Hutchinson Cancer Center in Seattle, Wash. “When someone makes a gift, that’s the key thing,” he said, adding that the annuity rate might not be as large as a donor might like or expect but the tax-free nature is an added benefit. For example, a single 76-year-old who contributes $25,000 gets an immediate deduction of $10,485 and an annuity of $1,500 for as long as they live. About $1,230 of the annuity would be tax-free for their life expectancy – which is about 12.7 years, said Mercy Corp’s Downey, making the overall effective annuity rate about 9.78 percent.

Barnes expects this economy and interest rate environment to “right size” the annuity market. “People aren’t starting up new annuity programs. My sense is, we’re losing 5 to 10 percent of gift annuity programs because they’re being shut down or modified. There’s a weaning out that’s happening. If someone can hold on, assuming the economy is going to get better in the next year — or next several years — those who have weathered storm will be well placed to capture opportunity at the end of that storm.”

If an organization is 25 years old or younger, it’s tricky because it doesn’t have that longevity. Yet, the younger the organization, the greater the opportunity, said Barnes.

Locke credits at least some part of the ARC’s success to continued marketing of annuities, and planned giving overall. “Some charities backed off on marketing, with more emphasis on bequests or other types of gifts people might make. We didn’t stop talking about bequests,” said Locke.

ARC sends lead generation pieces about 10 times a year, with at least two of those having a primary emphasis on gift annuities. While direct mail is still the primary vehicle for communicating about planned giving, Locke said they receive more and more email addresses from donors, who often prefer that mode now.

“There’s no question, our current annuitants are our very best market,” said Locke, mailing them at least once a year reminding them that the rate has changed and it’s a year later. “Invariably we get repeat gift annuities from those folks. It’s not unusual that we hear from them in a day or two after contacting them. That’s a real important audience for us, we never stop talking with them,” said Locke. NPT

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