A Charitable Gift Annuity ("CGA") is one of the easiest forms of planned giving. In exchange for an immediate gift to a charity, the donor is promised a specified lifetime income. The exact amount of that gift is agreed upon at inception. Typically, the life income goes to the donor or is shared as a 100 percent joint and survivor option to the donor and spouse. The arrangement is that simple. There is a written agreement of understanding between the donor and the charity. If the charity ceased to make the agreed upon payments, the donor would be a primary creditor against that institution. Obviously, a century-old establishment such as a nonprofit hospital or major community church would have an easier time attracting a CGA donor than would a recently-established organization. Some states, including Florida, require that the charity establish reserves for the annuity liability.

The maximum rates of return that are typically paid on these annuities are established by the American Council on Gift Annuities. Meeting each three years, this grouping of a large number of substantial national charitable organizations uses interest and mortality assumptions to set up current actuarial tables.

In the event a donor accepted a rate of return below the ACGA tables, it would pass on an even larger gift portion to the charity at the donor's death. In the event an organization offered rates of return considerably above the established tables, it runs the risk that the IRS may disallow the contribution as a gift.

How does Annuity Reinsurance Work?

Remember that the agreement is for the charity to pay a lifetime income to the donor. Once the agreement is completed, the manner in which the charity invests its assets to carry out that goal is exclusively the charity's business. The organization can take the full proceeds of the donor's gift to a bank's trust department and ask them to manage the assets. In the event that market conditions seriously diminish the value of a portfolio, those continued income payments may cease. Also, in the event that a donor significantly exceeds his or her life expectancy, all the resources of the gift may be exhausted.

If the gift proceeds are gone, the charity must reach into other resources to continue the lifetime payments. By utilizing annuity reinsurance, however, these risks can be eliminated.

In a reinsurance transaction, the charity takes the entire gift from the donor and in turn purchases a life annuity from an insurance company with the proceeds. The annuity can be immediate or deferred. The cost of purchasing that lifetime annuity is lower than the amount of the gift which was tendered.

In the case of immediate income annuities to donors in their seventies or older, the charity may be able to obtain the life annuities at a 35 to 50 percent discount. That spread between gift and purchased annuity represents outright cash which is available today to the charitable institution.

The annuity reinsurance is a valued dimension which helps the donor proceed with the gift. The charity is able to reassure the donor that a financially strong insurance company stands behind its commitment to guarantee him a lifelong income. The charity transfers to the insurance company all the interest rate risk, investment risk and mortality risk. The insurance company actuarially assumes all of these risks. In addition, the insurer takes on the administrative duties of monthly income payments and tax reporting.

What if the Donor is Very Old or In Poor Health?

In these situations, the charity may purchase a life annuity with a period certain guarantee. Such an annuity provides a life income regardless or the donor's lifespan plus it guarantees the income stream payments for a minimum fixed period, say ten years. If the charity is both the owner and the beneficiary of the annuity, it could benefit from any unused future guaranteed payments in the event the donor dies within the 10 year guarantee period.

So in a situation where a donor only survived two years of that 10 year period certain guarantee, the remaining eight years of payments would go directly to the charity as beneficiary of the policy. In this instance, the charity could ultimately obtain significantly more that its anticipated 50 percent remainder.

Starting a Charitable Gift Annuity Program

The simplest way to begin a CGA program is for the charity to contact their donor base of older clients who are in their retirement income years. These donors typically have many fixed investments such as CDs, T-bills, and the like. It may make sense for those donors to roll over some of those proceeds into a CGA. The CGA can also be structured to allow for the creation of a life insurance estate upon the death of the donor. If the donor is willing to accept a reduced income stream, part of the donation may be diverted to pay the premiums on a life insurance policy. This will generate a death benefit to relatives which could replace the capital gifted to the charity. Or the charity can be named as the beneficiary of the life insurance policy to receive the death benefit as a future gift.