About Gift Annuities

Table of Contents

What is a Gift Annuity?

A charitable gift annuity is a contract between a donor and a charity (not a "trust"), under which the charity, in return for a transfer of cash, marketable securities, or other assets, agrees to pay a fixed amount of money each year to one or two individuals, for their lifetime.

A person who receives payments is called an "annuitant" or "beneficiary." A portion of each payment is considered a tax-free return of the donor's gift during the life expectancy of the annuitant(s). After that, the payments are considered entirely taxable income.

The contributed property (the gift), given irrevocably, becomes a part of the charity's assets, and the payments are a general obligation of the charity. The annuity is backed by the charity's entire assets, not just by the property contributed. Annuity payments continue for the life/lives of the annuitant(s) no matter what the investment experience of the gift annuity fund.

Charities that offer charitable gift annuities should be aware that many states regulate the issuance of gift annuities. Usually, regulation is under a state’s Insurance (or Securities) Laws. Charities may be required to comply not only with regulations in the state in which the charity does business but also in the state of residence of the donor.

Many states that regulate charitable gift annuities require the charity to supply the state with the charity’s published gift annuity rate chart of the maximum annuity rates the charity offers, listed by "actuarial age" (age on the birthday nearest the gift date).

If the charity uses the currently suggested maximum gift annuity rates published by the American Council on Gift Annuities (ACGA), regulating states will not require the charity to prove, through the use of an actuary, that their annuity rate chart is within that state's regulatory law. If a charity is involved with a regulating state and chooses to offer gift annuity rates that are higher than those suggested by the ACGA, the regulating state may require the charity to employ an actuary to prove that the assumptions used in setting its annuity rates are within that state's regulatory laws. This would include using the actual earnings rate of the charity's gift annuity fund and not the conservative assumptions used by the ACGA.

The gift annuity rates suggested by the ACGA assume the entire gift will be invested and only 1% (100 basis points) of the remaining fund balance will be expended annually to cover the cost of investing and administering the fund. While the charity may spend a portion of the contribution immediately, it must maintain sufficient reserves (as determined by state laws) to meet annuity obligations and satisfy regulatory requirements of each state in which the charity issues gift annuities.

The ACGA suggested maximum rates assume that the entire gift is held in reserve until the termination of the contract at the death of the sole or surviving annuitant. The remaining portion of the contribution at that time is called the "residuum". The ACGA suggested maximum rates are set to achieve a target residuum of at least 50% of the funding amount if the annuitant(s) live to their life expectancy and the gift annuity fund’s investment performance matches the ACGA’s assumed investment return. Offering annuity rates that target at least a 50% residuum is a requirement of many of the state gift annuity laws.

The charity should establish a means to track the ongoing value of each gift within its gift annuity fund so that it can withdraw the correct residuum amount (based on the "market value", not "book value" of each gift's residuum balance).

Types of Gift Annuities

There are different types of charitable gift annuities, and not all states permit the use of each type. Within the regulating states, the charity usually must submit a sample of each type of agreement it wishes to offer to the residents of that state before it issues any such agreements.

Versions of Agreements

Generally, there are three "versions" of each "type" of agreement. The "versions" are:

  • A "single life" agreement (annuity paid to only one person for their lifetime),
  • A "two lives in succession" agreement (annuity paid to person "A" and then if person "B" survives person "A", paid to person "B"), and
  • A "joint and survivor" agreement (annuity paid to two persons simultaneously and at the demise of the first annuitant, the survivor is paid the full annuity amount). This version is used for married couples who file joint tax returns and/or who live in community property states.

Types of Agreements

Immediate Gift Annuity

With an Immediate Gift Annuity, the annuitant(s) start(s) receiving payments at the end (or the beginning) of the payment period immediately following the contribution. Payments can be made monthly, quarterly, semiannually, or annually. The most common arrangement is quarterly payments at the end of the quarter. The end of a period can be any day of the month, but is typically the first day of a month, the last day of a month, or the anniversary date of the gift. The first payment is customarily prorated from the date of the contribution to the end of the first period and thus is smaller than the subsequent payments. It is, however, possible to stipulate that the first payment be for the full amount. All these factors have some effect on the amount of the charitable deduction.

The annual annuity is determined by multiplying the amount contributed by the annuity rate. The amount contributed is the fair market value on the gift date, NOT the net proceeds of sale if a CGA is funded with appreciated assets.

Deferred Gift Annuity

With a Deferred Payment Gift Annuity (DPGA), the annuitant(s) start(s) receiving payments on a date chosen by the donor at the time of the contribution that must be more than one year after the date of the contribution. As with immediate gift annuities, payments can be made monthly, quarterly, semiannually or annually.

Flexible Annuity

A Flexible (Deferred Payment) Gift Annuity means that the donor does NOT have to choose the payment starting date at the time of the contribution. Instead, the donor agrees to a range of possible payment start dates from which the annuitant can later choose. For example, the annuitant (who may or may not be the donor) may choose from among these payment start dates based on their retirement date or other considerations. The older the annuitant(s) when the payments start, the larger the payments will be.

This concept provides some of the flexibility offered by commercial annuities sold by insurance companies. The charity offers a schedule of payouts with differing fixed payment amounts and differing starting dates. The later the starting date in the schedule, the higher the annuity amount the charity agrees to pay. The schedule of possible payment start dates and their associated annuity amounts is established at the time of the contribution as part of the gift annuity agreement. Each annuitant must determine on an annual basis whether they wish the annuity payments to start that year.

Generally, planned giving tax calculation software does a good job in explaining these various types of annuity gift vehicles and some of them will even craft the gift annuity agreement that should meet the regulatory requirements of the states involved with that particular type of annuity gift.

The Philosophy of Gift Annuity Agreements

Any attempt to establish a philosophy of Gift Annuity Agreements must emphasize the word "gift". These agreements constitute one method by which charities solicit and receive contributions to carry out their purposes.

A person who enters into a Gift Annuity Agreement with a charity makes a gift to the institution and receives fixed payments for life. If the person could afford to do so, he or she would probably donate as an outright gift the entire amount paid to the organization; but he or she needs to make some provision for income while alive.

The maximum gift annuity rates suggested by the ACGA have been computed to produce an average "residuum" or gift to the organization at the expiration of the agreement of approximately 50% of the amount originally donated under the agreement. Consequently, the rates are lower than, and are not in competition with, annuity rates offered commercially.

The ACGA rates are based on actuarial studies of mortality experience among annuitants and a conservative projection of the rate of income to be earned on invested reserve funds. The ACGA engages professional actuaries to help determine the rates.

Offering gift annuities at rates higher than the ACGA’s suggested maximum rates may jeopardize the gift residuum for the charity. If the rate is too high, other funds or the general assets of the organization may be required to carry out the terms of the agreements.

In some states, state statutes and regulations regulate Gift Annuity Agreements. Where such laws are in force, the State Commissioner of Insurance generally administers them. While each state's law is different, the statutes generally deal with the filing of information, the maintenance of reserves, and the rates of return of the gift annuity pool. Charitable organizations should consult their own legal counsel regarding the applicability of state law to their particular situations.

Gift Annuity Agreements have been utilized by some charitable organizations for more than a century. They are in established use and are favorably regarded by these organizations as a proper method of receiving contributions. Many leading educational, religious, and charitable institutions have received significant gifts through Gift Annuity Agreements, thereby benefiting their work and at the same time returning to the donor practical benefits and spiritual satisfaction.

Considering a CGA Program?

There are a number of issues to consider before starting a charitable gift annuity program.  It is important to review your organization’s background, financials, structure, and management to determine whether you are ready to take on the responsibilities entailed.  

I.  History, Corporate Structure 

A.  Organization Longevity
  • Is there a pipeline of possible and probable donors who are able and likely to create gift annuities with the organization?
  • Do donors have confidence in the longevity of the organization, such that they assume that it will make all present and future income payments as obligated under the annuity agreement?
  • Does the organization have a stable and successful investment history that demonstrates its fiduciary responsibility and financial stewardship?
B.  Corporate Structure
  • Do the articles of incorporation and bylaws of the organization or any other organizational documents make reference to the ability of the organization to act in a fiduciary role as is required for offering gift annuities?
  • Does the organization have a clear, written strategic, and long-term mission that focuses on perpetual issues that transcend generations of donors?  The presence of endowments and other long-term gift and investment vehicles will be important to donors looking to establish a lifetime annuity with the organization.
  • Does your board have a gift acceptance policy that includes or could be revised to include: the types of gift annuities accepted; guidelines for variations in gift annuities to be issued; and administration and investment policies and procedures?

II.  Financial Review

A.  Threshold Requirements

  • Does your organization satisfy the minimum threshold in financial assets (usually $300,000 to $500,000 in unrestricted assets) required by many states for the issuance of gift annuities? Your answer to this question may limit the geographic area in which your organization can legally issue gift annuities.
  • Is your organization financially secure with sufficient cash flows such that it is able to undertake a gift annuity program that may generate future income but possibly little or no current income for years?
  • Can your organization bear the starting and ongoing costs of a gift annuity program including marketing gift annuities, issuing agreements, making annuity payments, legal fees, software, tax, and other compliance?   Staff time should be factored into costs as well.

B.  Financial Administration

  • Does your charity currently manage its own endowment, investments or other funds?  If so, does it have an investment policy that provides for the safety needed to generate a reasonable return on gift annuity reserves? 
  • Does your organization have the desire and ability to maintain a separate annuity reserve fund and ensure that there are sufficient investment returns to assist in making the payments from the reserve fund or from other sources?
  • Would your organization consider reinsurance of its gift annuities as a way to mitigate risk?  While some states may not permit reinsurance, other states will permit reinsurance subject to differing reserve requirements.

III.  Development Efforts

  • Does the organization have an established (minimum 3-5 years), consistent development program that successfully identifies, cultivates, solicits, recognizes, and stewards individual donors through multiple vehicles and dollar ranges? 
  • What is the staffing level for development management, front-line fundraisers, and administrative support?  Is this a one-state/local charity, a regional charity, or a charity that is national in scope, requiring field staff in various regions of the country?
  • Is there currently a planned giving program with a baseline bequest program and the capacity to recognize planned giving donors appropriately?

IV.  Program Management

A.  Adequate Staffing
  • Are there staff members available and knowledgeable not only to solicit gifts, but also to ensure effective administration and investment of gift annuities, either in-house or through an outside provider?
  • Do staff members have the legal and/or financial background to understand the risks of a program and to be able to determine which gifts are appropriate?
  • Is there in-house or outside legal counsel available to provide guidance on issues related to gift annuities?
  • Is there sufficient communication between internal divisions of the organization (i.e. resource development, finance, and legal) to operate a program effectively?
\B.  Sufficient Training
  • Are staff members sufficiently trained to market gift annuities, prepare gift annuity proposals, and close gifts?
  • Is training available to new or existing employees to learn about the technical issues related to offering gift annuities?
  • Are ongoing education or training opportunities available for staff to stay informed of changes in gift annuity regulations?
C.  Ability to Administer
  • Does the organization have the knowledge, staffing and structure in place to administer gift annuities in-house?
  • If not, are financial resources available to hire an outside firm for administration and investment purposes?
  • Can staff or outside consultants provide the ability to evaluate which firm to hire if help with administration is needed?

These are just some of the many issues to consider when starting a charitable gift annuity program.  If you are thinking about starting a new program, there is more information that will be of help to you throughout this web site. On the website, you can also become an ACGA member, which will provide you with access to a wealth of resources to assist your organization in establishing an effective and well-managed gift annuity program.

Are charities required to reinsure gift annuity contracts?

Although some states mandate investment guidelines and reserve requirements for gift annuity assets, there is currently no requirement for charities to reinsure charitable gift annuities. The decision to reinsure gift annuities is one that should be reviewed and determined by your organization’s legal, financial and administrative team. ACGA does not offer an opinion on reinsurance of gift annuities.

Can the ACGA assist with administering our gift annuity program and/or management of our CGA assets or provide a list of recommended firms that do?

The ACGA does not provide administrative services for gift annuity and/or planned giving programs, nor does the ACGA comment on or recommend specific vendors or services offered by vendors. You can view our virtual exhibit hall which might provide you with some firms to consider. We also recommend contacting charities with established planned giving programs to see what institutions they use and inquire as to their level of satisfaction with their providers. Resource listings might also be found in industry publications, such as the Chronicle of Philanthropy and Non-Profit Times.


The Fundamentals of a Successful Charitable Gift Annuity Program

Recommended Charitable Gift Annuity Best Practices

Sample Gift Annuity Disclosure Statement/Letter

Last Updated on Tuesday, November 24, 2020 04:31 PM