PGTS Standard
8. Gift annuity rates are in accordance with denominational policy. (NADWP S 40 45) [PGO, PGP, PGTS]
North American WP S 40 45 Gift Annuity Agreements—
1. Approved Organizations— General Conference, North American Division, union and local conference associations/corporations, and other legally recognized entities may issue gift annuities to the extent allowed by applicable laws and regulations.
2. Rate Schedules—Maximum gift annuity agreement rate schedules are provided by the General Conference Corporation to officers of unions and local conferences and institutions and shall be strictly adhered to by all issuing organizations.
3. Accounting—Gift annuity agreements shall be accounted for by Generally Accepted Accounting Principles (GAAP) for such agreements as set forth in accepted fund accounting manuals. Each gift annuity shall be accounted for separately, and no part of the total annuity amount may be used for operations until the death of the final annuitant.
4. Union/Division Counsel—Before denominational organizations enter into Gift Annuity agreements funded with cash or publicly traded securities in excess of $500,000 or other noncash assets, the denominational organization personnel shall obtain counsel from the Union or Division Planned Giving & Trust Services Director or officers.
Publishing of Maximum Rates
The General Conference Planned Giving & Trust Services (PGTS) Department works in cooperation with the General Conference Corporation of Seventh-day Adventists (GCC) to vote and then publish Charitable Gift Annuity (CGA) maximum rates annually or more frequently if the need arises. These rates are posted on the willplan.us website, published in the quarterly PGTS newsletter, and emailed to all certified individuals. The date of their becoming effective is given in all of these communications. As of the writing of this article (July 12, 2023), the last change in the maximum CGA rates was effective January 1, 2023.
Versions and Types of CGAs
When we say CGA, it tends to give the impression that there is only one; in practice, there are many different varieties of CGAs, and the correct maximum rate schedules need to be used when calculating the donor’s or annuitant’s charitable deduction and periodic payout.
Three versions of CGAs are available to donors to assist them in accomplishing their philanthropic goals. The differences involve who is paid and when they are paid.
The three versions of CGAs:
- One life – Only one person receives the payout during their individual life. When payouts begin, this individual receives the payments. When this individual dies, the payouts stop, and the residue is distributed to the charitable beneficiary.
- Consecutive or two lives in succession – Two individuals will receive the payouts. Donor/Annuitant “A” receives the payout during their lifetime, and then after they die, the second annuitant, “B,” if they survive “A” receives the payout for their lifetime. After both annuitants have died, the residue is distributed to the charitable beneficiary.
- Joint and Survivor two life – This version is often used for spouses to jointly receive the payout for both their lifetimes. This CGA version could also be used for persons who are not married, such as a parent and a disabled child. Both beneficiaries receive the payout for the entire balance of their two lives. When one dies, the survivor continues to receive the payout for their life. Here also, after both annuitants have died, the residue is distributed to the charitable beneficiary.
Keep in mind, there are three different types of CGAs that allow the donor to choose when the payout to the annuitant begins, either immediately or sometime in the future. Each type of CGA allows the donor to choose the payout start date that best fits their plan and income needs. One benefit of delaying annuity payments is the future payout amount increases the longer it is deferred.
The three types of CGAs:
Immediate – The periodic payout commences immediately upon the receipt of the donation and the signed annuity contract by the charity.
Deferred – The annuitant designates a payout start date that is at least 12 months after the donation date for the payments to start. A creative way for the Deferred CGA to be used is for grandparents to give a CGA to a grandchild when young that will start the payout at a date that is far in the future.
Flexible – The annuitant selects an event ( such as retirement) or range of dates at least 12 months after the donation to start the payouts. When the first date of the range is reached, the annuitant must annually confirm that they do or do not want the payments to start.
When choosing which type of annuity payments, it is important to ensure you have used the correct maximum rate tables or software choices when creating a proposal for the donor.
ACGA Rates
Even though, by policy, the GCC may choose to issue rates different than any other organization, the GCC usually approves the rates recommended by the American Council on Gift Annuities (ACGA). The ACGA rates are carefully researched and continually monitored to reflect market conditions. Most organizations, as well as the State of New York, are moving toward using the ACGA maximum rates. Since the GCC has voted to use the ACGA rates, all accredited organizations must use them as the maximum rates when they issue CGAs.
Calculation of Maximum Rates
You may find a reference to more information about the assumptions used to calculate the ACGA maximum rates at the bottom of this article. The primary assumption is intended to result in a 50 percent residue distribution of the original donation to the charity or charities at the end of all annuitants life expectancy.
The assumption that needs to be highlighted is the annual expected net investment return of 4.25 percent.
As of January 1, 2023, this assumption is calculated by assuming a gross investment return of 5.25 percent and subtracting 1 percent for operational expenses.
This assumption is important because if your organization has invested CGA donations and are earning an annual return of less than 4.25 percent, you significantly increase the possibility of the annuity payments exhausting the donated funds, resulting in nothing to distribute to your organization when the donor dies.
Bear in mind, that your organization must make the annuity payment for the entire life of all annuitants, and if the originally donated funds are depleted, the organization will need to use its own operating funds to do so. If your organization is concerned about how to invest the funds in a CGA pool, historically the General Conference through its partnership with BNY Mellon Wealth Management and Western Adventist Foundation (WAF) have done a great job of investing the assets, and often outperform the ACGA assumptions.
Standard and Policy Compliance
During your organization’s Trust Review, GCAS will sample your new CGAs during the period under review to confirm the payout rates comply with the maximum rates issued by the GCC. If there is a variance, it will be noted as a finding in the Report to Governance.
GCAS will also verify that the proper documentation from the Union or Division is in the file if a CGA is over $500,000 or is funded with noncash assets.
Conclusion
Standard #8 and the corresponding NAD Working Policy ensures all accredited NAD organizations do not offer annuity payouts that exceed a maximum amount. Without this standard, donors could be tempted to withhold their donation to one organization, and “rate shop” other charities to get a higher CGA rate. With Standard #8, all organizations offer the same payout, keeping the focus on the charitable intent.
In a competitive environment where “rate shopping” is the norm, organizations could be tempted to take greater risk, and offer a higher payout rate that is possibly not sustainable. This could lead to more CGAs going “underwater,” or exhausting its funds before all annuitants have died, and organizations would have to use more of their own operating funds to make the payments. These temptations could defeat the purpose of the CGA, which is to support the organization’s mission.
With the safeguards of Standard #8 and the Working Policy, the CGA can be a powerful tool in the Gift Planners toolbox to assist their donors as they plan and support the organization’s mission to reach people for Jesus.
For more information about the calculation of ACGA rates, see the link below.