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.

Her guaranteed installment refund period is 12 years, 7 months.

Her income payments are based on current rates in effect as of Dec. 10, 2007. The first payment is made 30 days after deposit. Because she did not elect an inflation option, her monthly payments will not change thereafter.

Andrews can now elect how much of her income she would like to gift to the nonprofit of her choice. Once elected, her gift is automatically sent to the nonprofit every month, year after year, by the insurance company.

Example: Andrews elects to gift 15% of her income from her DAA to a selected nonprofit. Using the above details, $680.07 monthly times 15% equals a $102.01 monthly payment gift to the nonprofit, or $1,224.12 annually.

If Andrews’ circumstances change in the future, requiring her to increase, decrease, stop gifts, or change nonprofits, she can notify the insurance company in writing.

Although the DAA program’s primary purpose is to provide Andrews with guaranteed income payments, while benefiting the nonprofit of her choice, unforeseen events may occur that require immediate cash. The commutation feature allows Andrews to commute all or part of her contract–that is, convert the value of her future income payments into a lump sum paid to her immediately. Commutation will reduce or eliminate future income payments for both her and the nonprofit.

In sum, by its flexible nature, the DAA program will provide donors with a level of comfort. They know they can currently give from their annuity income to their chosen nonprofits and that they can make changes as future circumstances dictate.

Jim Pedigo, CLU, ChFC CASL, is executive vice president of Financial Rate Watcher$ Inc., Longwood, Fla. His e-mail address is frwannuity@aol.com.