In Uncertain Times, Annuities Can Hook Donors: Here’s How They Work

The Oregon Community Foundation had an older donor who didn’t spend a lot, had a good pension, and often had enough excess cash to make gifts to support the foundation’s work. However, the donor wasn’t sure she could afford to give a big gift — she worried she might need some of the money later.

Rebecca Bibleheimer, the foundation’s senior complex gifts officer, had the perfect solution: a charitable gift annuity.

With annuities, purchasers pay a lump sum and in return get a set annual payment (typically a single-digit percentage of the purchase amount) for the rest of their life. Annuities are often sold by insurance companies, but charitable gift annuities are used by nonprofits to help donors who want to give now but aren’t certain about the economic future, Bibleheimer says. Charities get what’s left in the annuity after the donor dies — typically about 50 percent of the original sum.

It sounds complex, right? And that’s one of the primary reasons these tools don’t get enough use, says Ali Iqbal, president of the financial services firm TIAA Kaspick.

“People think, This sounds complicated, and I have to be wealthy or I have to have a big gift to do this,” Iqbal says. But that’s not true, he contends, noting that donors can set up these annuities with as little as $10,000 at some organizations. “This is really a good option for a middle donor — somebody who’s passionate about an organization, that’s been giving annually, and wants to make the big impact.”

In times of economic uncertainty, like the country is currently facing, these annuities are a good option to have when talking to donors, says Meg Cline, vice president for gift planning and trust services at the University of Illinois Foundation.

“Charities are going to leave money on the table” if they’re not talking to donors about a wide range of giving options, Cline says. “We need to work with donors to say, ‘What’s the best structure for you?’ It’s amazing when you have those transparent conversations with donors to say we want what’s best for them and what’s best for our charity.”

How Charitable Annuities Work

With an annuity, the percentage the donor receives is determined by his or her age. The older the donor, the higher the percentage value payment they’ll get. As an example, if a donor put $100,000 into an annuity and has a 6 percent rate, they will receive $6,000 a year for the rest of their life. It’s one reason they often appeal to older donors.

The charity or the financial firm it hires to manage the funds invests the funds and makes the payments from the fund, which in a perfect world is growing enough to cover the payments. These annuities are a type of planned giving because the charity receives any remaining money after the donor dies. Unlike other types of planned gifts like bequests, the donor can’t change their mind once the annuity has been opened. It’s an irrevocable gift — and the charity will get what remains.

“When they pass away, no one has to do anything as far as their executor,” says Emilye Pelow Corbett, planned giving program director at the Vermont Community Foundation. “So it’s a great option for the donor and the nonprofit.”

Donors can also designate someone else to receive the payments, and when they do, it can boost their pride and sense of connection to the organization, says Cline. She recollects a donor who had been giving her sister around $500 a month to help with living expenses but then set up an annuity and made her sister the income beneficiary.

“What was interesting was the pride that both she and her sister had because now, instead of her sister writing a check to her like a give-me, she went to her sister and said, ‘I’m going to make this gift to the University of Illinois Foundation to support scholarships that I’m really passionate about,”  Cline says. “And as a part of the gift structure, I get to name an income beneficiary and I’ve named you.”

A charitable gift annuity can be funded with cash or assets, such as appreciated stock or even real estate (though that’s less common).

Upsides and Downsides of Annuities

Smaller nonprofits often shy away from these instruments. They are complicated to be sure, but that isn’t the only reason, says Bibleheimer. When a charity opens a gift annuity, it is on the hook for paying the donor as long as they live. While actuarial tables are pretty good at predicting how long an organization would have to pay, some people outlive them or the investments underperform, and the charity is still on the hook.

This fact, Bibleheimer says, makes these annuities “especially scary” for small nonprofits. This is why these annuities are traditionally offered by large nonprofits, including colleges and universities. However, some community foundations, like the one where Bibleheimer works, will actually partner with small nonprofits, with the foundation taking on the liability, rather than the smaller entity. In return, though, community foundations ask that the remainder be held as an endowed fund for the nonprofit at the community foundation.

For a lot of donors this works, but Bibleheimer has seen donors who want the remainder to go directly to their charity, not an endowed fund that supports the charity.

“In that case, then it may make more sense to find a third-party vendor that will charge a fee but release the funds,” Bibleheimer says.

Risk Can Outweigh Reward

The inherently risky nature of investing can also introduce uncertainty into these products. Those begun right before a drop in the stock market may have a hard time recovering, Iqbal noted. A charity can even end up with nothing. Pelow Corbett says the Vermont Community Foundation currently has 97 gift annuities on the books and only two are at the point where they’re projected to have nothing left, or possibly go negative. The Vermont Community Foundation also takes on the liability, so if an annuity pays out more than the donor gave, the community foundation assumes that risk.

“So that’s a huge benefit to the nonprofit because if they were the one underwriting the gift annuity, they would have to pay them back,” if the annuity ran out of money to pay the donor, Pelow Corbett says.

Iqbal added the reverse can also be true. He recalled a nonprofit client whose donor put $100,000 into an annuity and died 30 years later. The value of the CGA had gone to $400,000 by the end. So it was a significant gift for the charity.

Both Pelow Corbett and Bibleheimer say when their community foundations work with smaller nonprofits, they will create projections and provide information to donors and handle all the paperwork and accounting that goes into creating the annuity, which is regulated by each state — so the paperwork can be different depending on where the donor is based.

While some may consider it a downside that the gift will come later, when the organization would like an immediate influx of cash, Cline says donors who give this way often continue to give to immediate needs. “Gifts now and gifts later are not mutually exclusive,” she says. 

Who Annuities Appeal to

Donors who choose charitable gift annuities tend to be people who are already very connected to the charity, have a reasonable but not enormous amount of money, and want to make a greater impact.

“It’s rare we’re working in the ultra-high net worth, large dollar amount space with these,” Bibleheimer says. “Usually it’s more of the ordinary, your neighbor — ones who aren’t in a position to give away large portions of their wealth.”

These donors often want the security of knowing they’ll have an income to fall back on annually for the rest of their life, says Cline, with the University of Illinois Foundation.

“I’ve seen a lot of charitable gift annuities with donors who really want to do something charitable, but they still need the income from that asset,” Cline says. “They can’t just say, I’m going to give you $100,000, and I don’t need this.”

Iqbal says some donors may have been considering a regular annuity anyway, but decide they’d prefer to use a charitable one so they can give something back, rather than have a corporation profit from the annuity remainder.

Because donors get better return rates at higher ages — where someone 65 may get a 5 percent annual payment rate but someone 75 will get a 7 percent rate, the donor pool is quite gray.

In times of economic uncertainty, donors are often drawn to these to allow them to give while still allaying their own concerns, Cline says. “Uncertainty generally allows us to have more conversations with donors who say they aren’t just going to be writing a check,” she says. “If we’re going to be successful in securing major gift commitments to support our organizations, we have to have tools to bring to the table to say there’s more than one way to support XYZ charity.”