Challenges in creating a CGA
Conceptually, a CGA requires the charity to hold and administer the donated
property throughout the remaining life
of the donor or donors. That creates several challenges for the organization:
• The organization may not have full
access to the donated property until the
donor or donors have passed away.
• The value of the donated property
might decrease, thereby reducing the organization’s resources.
• The donors may outlive their life expectancies, further reducing resources.
• Investment yields may decline, forcing the organization to use other resources to provide the promised annuity
payments.
source of future, stable revenue.
On the other hand, the need for current operating funds must also be met.
The difference between the donation
and the cost of an annuity to reinsure the
CGA obligation can provide a meaningful portion of the charity’s current operating budget.
In addition to investment-management challenges, organizations that consider managing their own CGAs face
administrative challenges, including:
• Issuing the checks
• Keeping track of all of the annuity
payments
Reinsurance approach
Given these risks, sometimes the organization will simply reinsure the obligation by purchasing an annuity from a life
insurance company. Doing so can permit the organization to let the insurance
company assume the risks of investing
and managing the funds, and the clients
outliving their life expectancies.
There are costs to the reinsurance ap-
ble foundation, whose purpose is to perform all those tasks and everything else
that needs to be done. In working with a
charitable foundation and using the reinsurance of an annuity purchased from an
insurance company, the smaller organization can expand the scope of its fund-raising efforts.
There are family considerations as
well. If mom and dad want to donate a
substantial portion of their net worth,
they will, in essence, be taking those
funds away from their children’s inheritances and will leave themselves without access to the gifted principal and any
appreciation thereof. They may need to
talk it over with the kids so that they understand the importance of the donation
and the desire to create an income they
can’t outlive, and to make sure the kids
are on board with a significant financial
decision.
Mom and dad also face the risk associated with inflation eroding the purchasing power of the annuity payments
over time.
Investment professionals can play a
crucial role in the move, facilitating
the use of commercial annuities to reinsure the CGA obligation. Doing so
could offer the investment professionals unique opportunities to generate
revenue for themselves, while assisting
charitable organizations to become more
financially stable and helping preserve
the organizations’ contributions to the
community.
IN ADDITION TO
THE INVESTMENT-
MANAGEMENT
CHALLENGES,
ORGANIZATIONS THAT
CONSIDER MANAGING
THEIR OWN CGAs FACE
ADMINISTRATIVE
CHALLENGES.
proach, however. The organization gives
up the opportunity for higher yields and
the possibility that the donor or donors
may have a shorter-than-expected life
span. However, conservatism and lack
of staff and managerial capabilities may
dictate the reinsurance approach.
Reinsuring with an annuity from a life
insurance company permits the organization to have immediate use of the difference between the donation and the price
of the annuity. It is important for organizations to develop endowment funds as a
• Accounting for the investments and their performance if
the organization chooses to retain the assets instead of buying an immediate annuity from an insurance company
• Keeping track of the receipts and
payments even if they do reinsure the obligation by purchasing an annuity from
an insurance company
• Determining the portion of the payments that are capital gain, interest and
return of basis
• Issuing the 1099R at the end of each
year
Many smaller organizations choose to
work through a local or regional charita-
(Federal tax laws are complex and subject to change. Neither Nationwide nor its
representatives give legal or tax advice. It
would be important to talk with an attorney or tax advisor for answers to specific
questions.)
David K. Smucker, CPA, CLU, ChFC, is a senior consultant in advanced sales for
Nationwide Financial Services Inc. in Columbus, Ohio.Co ntact him at smucked@
nationwide.com. (Life insurance and annuities are issued by Nationwide Life Insurance
Co. or Nationwide Life and Annuity Insurance Co., Columbus, Ohio, member of Nationwide Financial.)
