When is an Investment NOT an Investment?

If it looks like a duck, swims like a duck, and quacks like a duck, then it is probably a duck. But, not always.

If it looks like an investment, involves tax consequences like an investment, and produces a return like an investment, then it is probably an investment. But, not always.

So, when is an investment not an investment?

When it’s a Charitable Gift Annuity.

“A CGA is a contract (not a ‘trust’), under which a charity, in return for a transfer of cash, marketable securities or other assets, agrees to pay a fixed amount of money to one or two individuals, for their lifetime,” according to the American Council on Gift Annuities. 

Rubber Ducks by Felix63 via FlickrI’ll admit that CGAs do look a great deal like an investment vehicle. A CGA involves a proposal that contains an illustration of how the gift will work; it involves tax benefits; and, it involves a rate of return. It’s easy to see why donors and even many development professionals think of CGAs as an investment opportunity.

The ACGA Board of Directors voted recently to make no changes to the suggested maximum CGA return rates that originally became effective January 1, 2012. The current rate schedule will remain in effect until further notice. This news prompted a planned giving professional to post the following message on a listserv: 

We usually do a promotion to current annuitants and recent inquiries, when the new CGA rates get announced. Whether they go up or down, it’s a message I can easily work with (either promoting the new increased rates, or ‘act now before rates go down in July,’ etc.).

Not sure what to do since they are staying the same – they’re not so great that staying the same is anything to brag about. Just curious what others are doing, or if laying low on this and focusing promotions in other areas.”

That posting demonstrates that some development professionals tend to think of CGAs as investment vehicles rather than philanthropic instruments. There are a number of reasons why this is problematic:

1. The government says CGAs are not traditional investments. CGAs are regulated quite differently than commercial annuities. Investment houses and insurance companies are held to vastly different accountability standards and procedures than charities are. The more a charity promotes the investment component of a CGA, the more it will look like an investment house or insurance company. That, in turn, can invite some unwanted scrutiny from government regulators, or worse.

2. CGAs usually pay a lower rate of return than commercial annuities. At the very least, this can make CGAs a bad investment option when compared to commercial annuities or other true investment options. One reason CGAs pay a lower rate is that they are not traditional investments. Instead, they are donations that give something back to donors.

3. A donor signs a CGA contract because of the charity’s mission. A donor can receive a similar or identical rate of return by signing a CGA contract with any nonprofit organization. The reason a donor will make the gift to your organization is because of the work your organization does and the relationship the donor has with you and the charity. In other words, philanthropic intent plays a huge role in CGA decisions. On the listserv I referenced above, another development professional responded to the original posting:

CGA rates, I suppose, are OK to promote, but we try to focus on donative intent and the mission.”

Another response stated:

As long as you are pitching a CGA as a financial tool, instead of as a gift, I think you’re missing the opportunity to promote the institution.”

Avoid the pitfall of thinking of CGAs as investment vehicles. Instead, recognize CGAs for what they are: one of the most popular types of planned gifts. Understand the importance of institutional mission and donative intent when talking with people about CGAs.

CGAs are a great way for older donors to support the charities they love while generating an income for life for themselves and/or their beneficiaries. Yes, you will talk with your prospective donors about the rates of return and tax benefits. However, you’ll close CGA gifts because of the good work your organization does and the feelings that are in the donor’s heart.

Remember, CGAs may look like an investment vehicle, but they’re really about philanthropy. And, as a development professional, part of your job is to suggest the philanthropic instruments that can best meet the goals your donors. For an individual donor, that may or may not involve a CGA proposal.

That’s what Michael Rosen says… What do you say?

 

[Publisher’s Note: For more donor-centered planned giving tips, checkout the book Donor-Centered Planned Gift Marketing. The book earned the AFP-Skystone Partners Prize for Research in Fundraising and Philanthropy and a spot on the official CFRE International Resource Reading List.]

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8 Responses to “When is an Investment NOT an Investment?”

  1. Michael, you are absolutely right that charitable gift annuities are gifts, not investments, and must be promoted as gifts.

    There is more to the story of gift annuities. Readers should keep in mind that a gift annuity does involve an “investment in the contract” component that works exactly like a commercial annuity. For that reason, a gift annuity is actually a bargain sale of an annuity: a gift portion and an investment portion. As you know, the Philanthropy Protection Act of 1995 resolved a horribly frightening national lawsuit by saying that charitable gift annuities are securities, but will not be regulated as commercial securities as long as they are marketed as charitable gifts and the residuum is used for charitable purposes, not for the benefit of annuity salesmen or for-profit firms.

    • Ron, thanks for commenting and providing more background for folks. The government dealt with the CGA issue in its normal, confused way: CGAs are securities, but they just can’t be marketed that way. 🙂 Fortunately, as twisted as the legislation and regulations are, it works reasonably well as long as nonprofits remember the rules. In the case of CGAs, the government actually did the nonprofit sector a big favor by requiring that CGAs be marketed as charitable gifts. They actually work much better as a philanthropic, rather than purely investment, instrument.

  2. Michael,

    This was a very educational post today. I always appreciate learning more about planned giving from you, and I believe CGAs are a great option for a donor when making a planned gift.

    Planned giving offers many options for a donor to choose when supporting an organization. Our job is to educate the donor about each option and then encourage them to talk to their financial planners to choose which option is best for them. We must always remember we should not choose for them but fully inform them of each option’s pros and cons.

    • Richard, thanks for your comment. Being part of being donor centered is making sure the prospect has sufficient information with which to make an informed decision. Education is an important part of the relationship-building process, as you’ve said. As development professionals, we just need to be careful, while we’re educating folks about gift giving options, not to forget that we need to make sure folks understand how efficiently and effectively the organization is fulfilling its mission.

  3. Hi, Michael,

    Right on here about CGA’s being related to “donative intent” vs. “investment vehicle.” I don’t know if there are GIC investment instruments or guaranteed deposit + return investment instruments in the US, but in Canada, some charities and donors market CGA’s as a favorable investment alternative to GIC’s. The correlation is that both offer returns based on a market/annual rate. The key difference is that with a GIC, your capital is returned to you and with a CGA, that’s not the case.

    To be honest, I have always questioned the practice of promoting CGA’s at all – I’m a bit contrarian in that perspective. Here’s why:

    1. Self-insured – very risky for smaller charities and problematic even for larger institutions in situations like the current recession which saw a very steep and sudden drop in investment returns. Since most charities in Canada are legislatively blocked from offering these at all, the considerations are mostly a non-issue here.

    2. Re-insured gift + annuity – I find these gifts muddy the waters – if the donor requires the financial instrument why not purchase it through their own insurance broker? Why are charities essentially creating sales for insurers that yield little/no return or commission on the sale for the charity? The donor could just as easily simply make the gift portion as a straight donation and both the charity and donor benefit the same whichever way the gift is made?

    The best scenarios where I’ve seen CGAs work is where they are one of the moving parts in a more complex gift plan – and that’s where they become a donor-centered gift. As a mass-marketed giving vehicle, I’m not sure I really see the fit.

    And…as I think we would probably agree…why spend energy mass-marketing CGA’s to the public when bequests are the simplest and most popular way to go?

    Interested in your thoughts and thanks for starting a great conversation!

    Christina @GPtekkie

    • Christina, thank you for your detailed comment and for sharing your Canadian perspective. To a degree, I share your lack of enthusiasm for CGAs for the reasons you have stated. However, despite the current low-interest rate environment, older donors may still derive significant benefits from CGAs. As investment portfolios have rebounded, charities that had CGA programs that were underwater at the depth of the recession have largely recovered. And, even during the worst of times, I do not believe that a single charity ever defaulted on making its CGA payments. So, for some donors, CGAs remain an worthwhile option. And, for charities, the risks are not great provided the funds are properly managed. For smaller charities, third-party options can allow them to offer CGAs at greatly reduced risk. For example, many community foundations offer CGA programs that can be marketed by smaller nonprofit organizations.

      Now, having said all of that about CGAs, I would never advise a charity to invest in a CGA program to the exclusion of a bequest program. A bequest effort will likely yield more donors and more money. However, I do understand why some organizations find CGAs so attractive: 1) a portion of the CGA donation is bookable as a current asset unlike a bequest which is a deferred gift, and 2) CGAs are irrevocable unlike bequest commitments which are revocable in the absence of a signed pledge agreement. Yet, for the reasons you’ve stated, CGAs are not especially attractive for charities, particularly as donor life expectancy increases. The old thinking has been that the residuum for the charity would be about 50 percent of the CGA gift amount. However, many charities are seeing far lower residuum rates these days.

      For me, CGAs remain a viable, worthwhile planned gift option for some donors and some charities. However, I particularly like bequests, gifts of appreciated property (i.e.: stock), and gifts from retirement funds.

      • An excellent, helpful and intelligent reply! Enjoyable to read and hope to have a chance to talk on phone/in person some time further. Thanks for beginning this conversation!

        Christina @GPtekkie

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