Scam Alert: Some Charitable Gift Annuities May Cause Problems

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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.

Lets clear one issue up immediately. The issue on the table isnt whether a commission should be paid when a charity purchases a commercial annuity to back up the charitys annuity payments to the donor. Rather, the problem is the payment of commissions for setting up or procuring the charitable gift annuities themselves.

Collecting a commission for setting up the charitable gift annuity itself is generally considered a no-no. While charging the commission isnt technically illegal, its considered to be inappropriate by most reputable charitable giving planners.

The National Committee on Planned Giving (NCPG) has adopted model standards of practice for individuals in the charitable gift-planning world. The model standards clearly state that payment of commissions to an independent planner as a condition for the delivery of a charitable gift is never appropriate. (The full text of the model standards can be found at NCPGs Web site, www.ncpg.org.)

Even if youre not convinced by the model standards, there are plenty of other reasons to avoid charging commissions to set up a charitable gift annuity. Consider the following:

Dont mess with your reputation. If charitable planning is a regular part of your business, then you probably ask your charitable clients for referrals. Imagine what could happen to your referral base if word gets out that youre charging commissions that the planning world deems to be inappropriate. Dont risk your broader business for short-term gain.

Be suspicious. If someone approaches you with an offer to pay commissions in exchange for your clients charitable gifts, theres a good chance that the person doesnt represent a reputable charity. Ask questions. Protect yourself from an organization that may not be on the up-and-up.

Can you justify your clients income tax deduction? If part of your clients charitable contribution is paid back to you as a commission for placing the charitable gift, whats the deduction? It seems reasonable to argue that the charitable contribution should be reduced by the amount of commission paid.

What questions do you want to answer in the future? The industry has been down this road before. Unscrupulous operators can make it difficult for everyone. You only make yourself look bad if youre taking commissions that most charitable giving planners dont charge. If this marketplace gets messed up, do you want the regulators calling you?

Done properly, charitable gift annuities are excellent planning tools, benefiting both donor and charity. Avoid some of the problems that have recently come up in the marketplace. Stay clear of little-known operators and dont charge commissions for setting up the charitable gift annuity itself.

, JD, is a senior marketing consultant for TIAA-CREF, New

York, NY. He can be reached via e-mail at cannalor@tiaa-cref.org.


Reproduced from National Underwriter Life & Health/Financial Services Edition, December 2, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.