A major problem for today’s nonprofit organizations is the potential they face of having to cut back on outreach programs, or even close down, due to lack of funds. Hence, they are constantly on the lookout for new long-term fundraising approaches.
A donor advised annuity (DAA) program might be the solution for some. This is a program using a special purpose immediate income annuity issued by commercial life insurers. It is designed for donors having varying lifetime income needs.
A DAA program is not a charitable gift annuity (CGA) program. Rather, it provides for a source of dependable personal income and a gifting alternative that complements CGA arrangements.
A CGA program may or may not be insured by an insurance company. A CGA program enables the donor to irrevocably transfer assets comprised of cash, real estate, or marketable securities to a nonprofit that issues the CGA in exchange for a current income tax deduction and the nonprofit’s promise to make fixed payments to the donor for life. Payments can begin immediately or can be deferred to some future date.
By contrast, the DAA program uses a special purpose commercial income annuity that can meet the disclosure and no selling commission guidelines of the Association of Fundraising Professionals and the National Committee on Planned Giving. It is funded by cash from the donor, and the premium deposits can come from any source (e.g., individual retirement accounts, 401(k)s, bank certificates of deposit, or mutual funds).
Unlike the CGA’s irrevocable status, the DAA program, under the terms of its annuity contract, leaves control of the principal and income with the donor, who is usually the annuitant/owner.
In the DAA program, income is paid to both donor and nonprofit named by the donor. This payout is based on the payment option and dollar amount selected by the donor in the payee section of the annuity application. The income amounts can be changed by the donor, depending on future income needs–a feature that may be more appealing to a donor compared to the irrevocable nature of the CGA. Income paid to the nonprofit is deductible to the donor under standard income tax rules.
Here is an example of how it works: A hypothetical Mary Andrews, age 70, makes a premium deposit of $100,000 to her DAA program. The insurer offers several single-life and joint-life payment options, including inflation riders. Andrews elects to receive monthly lifetime income payments and, by electing an installment refund equal to her original deposit if she passes away prematurely, a guarantee that her original deposit will not be lost.
Her lifetime income payment is $680.07 monthly, equal to $8,160.84 annually.