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.
I’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.]
