Scam Alert: Some Charitable Gift Annuities May Cause Problems
Charitable gift annuities are wonderful planning tools, but theres been some recent talk about them involving scams and commission problems. Heres what its about, and heres how to avoid any of the fallout.
But first, lets start by reviewing how a charitable gift annuity works. A donor gives property to a charity, and the charity agrees to pay that donor annuity payments (generally for the donors life). The present value of the stream of annuity payments is typically less than the value of the property given to charity, and the difference between the two is a charitable gift.
The concept is relatively simple. You give more to the charity than you get back, and you take a current income tax deduction for the difference. Charitable gift annuities are effective planning tools, too. Theyre a great way for a donor to make a charitable gift while generating cash flow from donated property.
The charitys agreement to make annuity payments is an unsecured promise to pay–making the donor a general creditor of the charity. Though it wont change that relationship, agents and advisors often simplify the transaction by selling a commercial annuity to the charity to back up the payments the charity must make to the donor.
So whats the fuss? Charitable gift annuities are highly respected planning tools that have long been offered by reputable charities. The problem is that some recent transactions have tarnished the reputation of the charitable gift annuity market.
Heres the situation. In late 2001, a U.S. District Court in Arizona issued a temporary restraining order against Robert Roy Dillie and Mid-America Foundation Inc. The SEC accused them of selling purported charitable gift annuities to elderly investors and misappropriating an estimated $54 million to pay personal (and often extravagant) expenses, including aircraft charters, gambling debts, personal residences, a ranch and child support.
That prompted the North American Securities Administrators Association (NASAA) in August to name charitable gift annuities as number eight among its top 10 investment scams listed by state securities regulators. While NASAA pointed out that most charitable annuities are legitimate investments, it cautioned investors to be wary of little-known organizations or those that provide only sketchy information.
It would be wise for agents and advisors to be cautious, too. If you focus your charitable gift annuity business on reputable charities, youre unlikely to run into any problems. You should be suspicious of unknown organizations soliciting charitable gift annuity business–especially those offering commissions.
That brings us to another issue in this marketplace. The NASAA listing has sparked at least one commentator to remind us of the perils of paying commissions for placing charitable gift annuities.