Charitable gift annuities: the gift that keeps on giving.

GMNG TO CHARITY, GETTING a tax break and locking in an additional stream of income all at the same time is a tempting combination that some financial advisers say has made charitable gift annuities (CGAs) one of the leading planned giving vehicles in the market today.

With an aging society of baby boomers thinking about retirement and wealth transfers alongside looming estate tax laws, experts say those in a position for charitable giving can weaken the tax blow while increasing their cash flow.

"Who doesn't like the idea of giving to a charity or nonprofit they support while at the same time having an opportunity to improve their own financial situation?" said Greg Feltus, executive vice president of the private client group at Stephens Inc. of Little Rock. "Right now the baby boomers are looking at their estates, and they're awakening and thinking long and hard about these things. Gifting can be a critical element to those plans in a manner that you can help reduce your estate tax and find other sources of steady income."

A growing number of the state's nonprofits, foundations and charities are beginning to offer annuity programs. Some report that CGAs have been a fundraising tool for years and are steadily becoming a significant part of their annual budgets, while others are just starting annuity programs of their own.

"The main reason I think they are so popular among World War II- and Depression-era donors is because it is a fixed deal and it's not out in the market. They can trust it won't change," said Janet Ginn, president and CEO of Heifer International Foundation of Little Rock.

Ginn said Heifer International had more than 1,500 donors enrolled in CGAs that amount to nearly $20 million in manageable funds for Heifer International.

Shelley Myers, director of finance at the Arkansas Symphony Orchestra Society Inc., said the ASO had just received state approval to begin offering CGAs. The orchestra is studying the impact CGAs could have on its annual budget.

Low interest rates for investment products like cash deposits and an unstable stock market get some of the credit for the surge in popularity of CGAs, and the American Council on Gift Annuities strives to keep its rates competitive in the market. The ACGA, considered the governing body of CGA programs, sets annuity rates that most nonprofits, charities and foundations follow to make their products attractive to potential donors.

What Are They?

When people consider donating substantial assets during their lifetimes, Feltus said, they are generally concerned about maintaining a consistent income flow while minimizing taxes.

"Typically there are two things that come into play when you begin thinking about gifting: you get a tax deduction for the gift and you avoid capital gains tax, and you'll get the deduction off your income tax," Feltus said. "Essentially you can turn a nonincome-producing investment into a potential income-producing investment. And that in my mind is a pretty efficient gift."

A CGA is simply an official agreement between a donor and a charity in which money, securities or real estate is signed over to a charity or nonprofit. In return, that charity agrees to pay the donor a fixed income for life.

Most nonprofits set a minimum donation of at least $5,000, while some CGAs begin in the millions. The annuity payments are based on life expectancy, so the older the donor; the higher the periodic payment that can be locked in.

The ACGA meets annually to set the rates, which range anywhere from nearly 5 percent at age 50 up to 11.3 percent at age 90 or older; and most charities follow those suggested rates.

Give and Receive

Aside from the immediate tax deduction and guaranteed lifetime income, many donors find CGAs attractive because, once the decision to donate is made, the paperwork is simple.

"The reason they are so popular is because they provide secure, fixed income, and we deal with a lot of donors that do not trust the market, and the charitable gift annuity is a fixed income and does not fluctuate when the market goes up and down more like the stock market," Ginn said.

"Another reason is because they are a simple contract between the charity and the donor;" she said. "They are a simple instrument to use, provide lifetime income, receive a charitable deduction for a portion of the gift, and the lifetime remainder of that after donors pass away goes to the charity they love. It's a win-win situation."

For example, based on the current 6 percent rates for a 65-year-old, a donor who puts $100,000 in a CGA would get a $32,253 tax deduction plus income of $6,000 a year for the rest of his or her life. A donation of $500,000 of assets by a 70-year-old would yield $32,500 a year at the current rate of 6.5 percent.

"Obviously the rates are better the older the donor is," said Larry Morgan, director of development and public relations at Lions World Services for the Blind of Little Rock. Morgan said his nonprofit had about 25 CGAs currently in effect and a growing number of people who were considering them. "It's the kind of donation that has the potential to keep giving back to the donor while still feeling good about supporting a cause dear to them."

Ginn said CGAs were at their highest ever at Heifer International in 2002. The product took a hit last year, which she attributed to Hurricane Katrina, but this year the number of new CGAs is up 67 percent compared with 2005.

Regulations Protect Donors

Though CGAs are strictly contracts between a nonprofit and a donor, in Arkansas they are regulated by both state and federal agencies to give added protection to donors.

According to Joe Musgrove, director of the life and health division of the Arkansas Insurance Department, only about half the states in the country regulate CGAs.

"We're reasonably tough on this here," Musgrove said. "In Arkansas they must apply for a permit here, and we have a code cite about which standards they have to meet and how they establish their reserves. And once approved, nonprofits file annual audited financial statements with us to make sure the money is there."

That's a big safety net, but it's important because once a contract is signed, it's for life. Drawn-out legal fights have occurred in other states because donors' surviving family members didn't know the donors had signed over their remaining assets to a charity after death. In an Arizona case, an insolvent nonprofit defaulted on annuity payments to donors.

That's kept in check in Arkansas, which is one of a handful of states that requires nonprofits to check in annually with proof they consistently have reserves for the payouts.

"We're basically checking on two things," Musgrove said. "We regulate the rates that they charge on these things, which is the standard national rate, and we also make sure that for all the contracts that a charity has sold, they have enough assets isolated in a separate account to be able to make good on the benefits."

Nonprofits are required to be registered with every state in which a potential donor resides. Musgrove said more than 100 nonprofits were registered in Arkansas, many of which were national or out-of-state charities. Heifer International, which consistently gets donations from all over the United States, is registered across the board and goes the extra mile by following New York's guidelines.

"The strictest state is, of course, New York, and all of our investments are made according to New York state law, because if we can make that, then we know we safely can meet the other 49," Ginn said.

Arkansas has not experienced defaults or legal fights regarding CGAs, and Musgrove said he sometimes thought that states that didn't regulate them might have a point.

"There are times when I kind of agree with them. You're giving your money to charities; you take your chances," he said. "If you don't trust the charity, then you shouldn't be dealing with them anyway."

Though they're becoming the most popular; a CGA is only one of many ways donors can give to charities and still reap some benefits for themselves.

"The more successful people are, the more wealth is built up and the more critical all of these decisions become," Feltus said. "There are several different options for gifting to charities all the way down to their own foundation. The important thing is to explore all the options and make a sound decision."

In today's tax climate, in which many consider the estate tax a prime motivator for giving to charity, Feltus said it was all relative to general estate planning.

"To me, this is all part and parcel with estate planning," he said. "Recently, I was down in east Arkansas visiting with a family who owns a large farm, and one of their big concerns is that property has gone up in value in Arkansas in the last 10 years, and they're looking at a huge estate tax bill off of the transfer of those assets to their family. They're trying to figure out how to pay this without having to sell the farm."

He said eliminating the estate tax would be an easy fix, but the current climate was ripe for exploring charitable giving and annuities.

"In the interim, we have to figure out ways to deal with it, and gifting is a solid strategy to do that," Felton said.

BY NATE HINKEL

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Suggested Charitable Gift
Annuity Rates

July 1, 2006 through June 30, 2007

Single Life

Age       Rage

0-1        3.7%
2-5        3.8%
6-12       3.9%
13-19      4.0%
20         4.0%
21         4.1%
22         4.1%
23         4.1%
24         4.1%
25         4.1%
26         4.2%
27         4.2%
28         4.2%
29         4.3%
30         4.3%
31         4.3%
32         4.4%
33         4.4%
34         4.4%
35         4.5%
36         4.5%
37         4.6%
38         4.6%
39         4.7%
40         4.7%
41         4.8%
42         4.8%
43         4.9%
44         5.0%
45         5.0%
46         5.1%
47         5.2%
48         5.2%
49         5.3%
50         5.3%
51         5.4%
52         5.4%
53         5.5%
54         5.5%
55         5.5%
56         5.6%
57         5.6%
58         5.7%
59         5.7%
60         5.7%
61         5.8%
62         5.9%
63         5.9%
64         6.0%
65         6.0%
66         6.1%
67         6.2%
69         6.4%
69         6.4%
70         6.5%
71         6.6%
72         6.7%
73         6.8%
74         6.9%
75         7.1%
76         7.2%
77         7.4%
78         7.6%
79         7.8%
80         8.0%
81         8.3%
82         8.5%
83         8.8%
84         9.2%
85         9.5%
86         9.9%
87        10.2%
87        10.2%
89        11.0%
90+       11.3%

Source: American Council on Gift Annuities