Thursday March 28, 2024

8.1.1 How to Start a Program

How to Start a Program

How to Manage a Gift Annuity Program:  When starting a gift annuity program, your organization needs to consider how it will invest and administer gift annuity funds.

Marketing Gift Annuities:  If your organization will be marketing gift annuities on its own, consider its print, web site and e-mail marketing approaches.

Illustrating and Closing the Gift:  If your organization is illustrating and closing gift annuities in-house, it will need powerful software like CresPro or CresLite to help generate a convincing and accurate donor proposal.

Conclusion:  As you can see, gift annuity management is challenging, but can be easier if your organization has the proper tools, management and structure in place.
Gift Annuities are some of the best gifts to market to your donors. With funding permitted in any amount (a minimum contribution of at least $10,000 is the most common policy) and a simple contractual agreement to sign, they are one of the easiest gifts to make. In addition, a gift annuity provides a fixed income arrangement that your organization can market to senior donors because of the high annuity payout rates and potential tax-free income. The annuity payout rates recommended for use by charities from the American Council on Gift Annuities (ACGA) assume charities will receive approximately half of the original contribution amount. These are just some of the many reasons why charities and their donors love gift annuities.

If your organization is interested in offering gift annuities, there are a number of questions you will need to consider in order to get started: How will your organization invest and administer the gift annuity funds? How will your organization meet state and federal requirements to issue gift annuities? How will your organization market gift annuities to senior donors? How will your organization close the gift? Each of these questions will be addressed as we discuss four ways to begin and manage a gift annuity program. This discussion presumes your board has approved a gift annuity program and will authorize the creation of any needed segregated accounts.

How to Manage a Gift Annuity Program


When starting a gift annuity program, your organization needs to consider how it will invest and administer gift annuity funds. Your organization can choose to issue and manage gift annuities on its own using the help of a spreadsheet or software. If managing or administering gift annuities in-house is not feasible, your organization may wish to outsource this job to an independent administration provider, bank, community or religious foundation. In addition, your organization may wish to enlist the help of a community or religious foundation to provide you with illustration, management and marketing assistance for your gift annuity program. The best option for your organization will depend on its strengths and needs.

1. Manage It All In-House

If your organization is not large and has a very small pool of annuitants, it is still possible to manage the entire gift annuity program in-house, which entails your organization handling all of the marketing, gift closing and gift annuity administration and investments on its own. First, your organization probably will need to become qualified to issue gift annuities in its home state as discussed in GiftLaw 8.1.2. In the early stages, your organization will likely be handling its own print, web and e-mail marketing to donors. As the annuity pool expands, your organization will need to consider a more comprehensive approach to marketing, as discussed below. Of course, your organization will still need planned giving software, like CresPro or CresLite, to create convincing donor proposals and generate the annuity agreements for donors to sign. The most important aspect of gift annuity management is creating an organized system for managing and tracking annuitant data. In order to ensure that all payments are made, the charity typically places some or all of the amounts received into a gift annuity reserve account where funds are pooled and invested for growth (consult GiftLaw Pro 8.1.2 as some states require these accounts by law).

Tracking Balances

Because annuity funds are commingled in the reserve account, it is important for the charity to track individual annuity balances. When an annuity contract matures, the charity needs to know the remaining value of the contract. At maturity, the remainder value of the contract can be withdrawn by the charity from the gift annuity reserve account and used for its charitable purpose.

Tracking individual annuities begins when the annuity funds received are added to the reserve account. This may be done on the same day the donor transfers the funds to the charity for the gift annuity. However, if the donor funds the gift annuity with an asset that must be sold, the funds might not be added to the reserve until after the sale proceeds are received. (Note that state regulations may require immediate funding, even for assets that have to be sold. See GiftLaw Pro Chapter 8.1.2)

Once the funds are placed into the reserve account, the annuity administrator must continue tracking each individual balance. Organizations managing their gift annuity programs in-house begin tracking annuities on a simple spreadsheet. The spreadsheet should have columns for tracking the annuity starting value, the growth/return of each individual account based on the earnings or losses accrued to the reserve account (typically on a monthly or daily basis), decreases to the account balance as a result of annuity payments made and the present value of the annuity liability for the CFO. If creating and issuing annuitant checks in-house, your organization will need to verify that amounts and addresses are accurate, Form 1099-Rs are sent to annuitants and to the IRS on time and ensure that state annual reporting requirements are satisfied. This process continues until the annuitant or annuitants pass away. At that time, the charity generally withdraws the remaining amount from the reserve account based on the gift annuity tracking of that particular annuity agreement.

Methods of Tracking Annuity Balances

There are several methods that can be used to track annuity balances. These methods range from simple to complex. If a charity employs a professional administrator or uses the Crescendo Administration Software, the tracking method is more precise.

The most precise methods calculate an average daily balance for each annuity. This calculation involves taking the initial contribution and calculating the average daily balance for each individual annuity throughout the month. Earnings or losses to the reserve account are reported at the end of the month and then allocated among each individual annuity according to that annuity's daily average.

Some charities may choose a simpler method of tracking individual annuity balances. Instead of calculating an average daily balance and allocating earnings or losses on the annuity's daily balance, the charity may choose to simply allocate any earnings or losses based on an end of month annuity value. While this method is not as precise at the average daily balance method, it can be used by a charity.

Whichever method is used to track annuity balances, the most important aspect is for each charity to track annuity balances from the start of their gift annuity program. If tracking is not performed from the beginning, it is difficult and time consuming to recreate the tracking later. As you can see, this process becomes more difficult and cumbersome as more annuitants are added to the pool. For this reason, most organizations eventually move to one of the other administration options.

Example 8.1.1A

On March 1, Joe Smith transfers $10,000 of cash to his favorite charity in exchange for a charitable gift annuity paying 9%. Joe elects to receive his annuity payments on the last day of each month. Anna Administrator deposits Joe's check into the charity's reserve account on the same day the gift annuity is created. At the end of the month, Joe receives his monthly payment of $75. To track the balance of Joe's annuity within the reserve, Anna Administrator needs to know the growth or loss of the total reserve account. The bank statement for the reserve accounts shows a 1% increase for the month of March. Based on the simplified method of tracking, Anna would determine Joe's annuity balance by starting with the funding amount of $10,000 and subtracting his monthly payment of $75. That leaves a balance of $9,925. Anna then would calculate the reserve account earnings allocable to Joe's annuity. 1% of $10,000 is $100. Anna, therefore, would increase Joe's annuity balance by $100, leaving the balance for Joe's annuity at $10,025. Anna would continue with this method until the expiration of the annuity contract.

2. Manage It All In-House Using Crescendo Admin Software

As the annuitant pool grows to about 10 or more agreements, something more comprehensive than a spreadsheet will be required to manage your organization's gift annuities and reduce administration costs. Annuity administration software may be the solution. Using Crescendo Admin software, your organization can maintain and track its annuitant database, run present value calculations and generate helpful reports to comply with various state requirements. Crescendo Admin software will print the annuitant's checks and tax forms (1099s) and help your organization send this information out on time and in compliance with state and federal law. The Admin software contains everything needed to manage annuities in-house and its user-friendly interface makes it simple to use. Remember that all Crescendo software is available for a 90-day free trial period.

3. Managing an Annuity Program Using an Independent Provider for Investments and/or Administration

A third option would be to do all of the marketing and gift closing of gift annuities in-house, but outsource the investment and/or administration of the gift annuity account to an independent administration provider, such as a bank or community foundation. These independent providers can be used to handle just the investment of the annuity account and/or the administration (issuing annuity payments, 1099-Rs, etc.). There are numerous reasons why your organization may wish to go with an outside provider, including internal staffing and structural limitations. Inability to issue checks, complete tax forms or generate the required reporting data required by the individual states could also pose problems for your organization. External institutions offer structure and objectivity that make them a good choice for many organizations seeking external investment and/or administration of their annuity account. While these institutions charge a fee for their investment and administration services, fees typically go down in cost as the gift annuity pool increases in size.

There are independent administration providers that work with Crescendo and can help your organization better manage its gift annuity program. These individuals are skilled with financial, tax and state reporting requirements and utilize the Crescendo Admin software system to track annuitant accounts and make certain that the correct forms are completed and sent to the appropriate parties and agencies. Call Crescendo for the names of administration providers.

4. Arrange for a Community or Religious Foundation to Issue and Manage the Annuity

Finally, while your organization may wish to use a community or religious foundation only for investment and/or administration services (as discussed above), these foundations can issue gift annuities and manage the gifts for your organization as well. For smaller charities wishing to enter the gift annuity market, having a foundation manage most of the program may be an excellent choice, particularly if your organization is not yet qualified to issue gift annuities in a particular state (GiftLaw Pro 8.1.2). In this type of situation, the charity will likely still handle marketing of the annuities but have the foundation actually issue them on the charity's behalf either because the charity is not authorized by the state to close the gift agreement or simply does not want to bear the risk of doing so. The foundation will manage the contribution (write the annuity checks, provide Form 1099-Rs, etc.) and, to compensate for the expense of managing the annuity and incurring the risk to issue it, will receive a benefit depending on the arrangement made with the charity in advance. Different foundations have different policies regarding issuing annuities on another charity's behalf. Some foundations may distribute a portion of the annuity contribution immediately to the charity (perhaps 25%) while keeping the rest (the 75%) in an invested fund to pay the annuitants. Typically, the foundation would retain the balance of the fund when the contract ends. Other foundations keep 100% of the contribution amount until the contract ends and only then distribute the remainder to the charity, keeping a portion such as 10% for the foundation. There are many other options, so your organization must take time to determine which foundation's arrangement is the most beneficial. While your organization will not receive the full benefit of the annuity in this type of arrangement, it will avoid having to meet state requirements (such as segregating an account, maintaining a minimum balance, obtaining a permit, submitting annual reports to state regulators, etc.), bearing the risk of the agreement and managing the annuity itself.

Many foundations even offer to help an organization if it lacks a full-time planned giving staff member by running proposals and meeting with donors to execute agreements. Please contact your local community or religious foundation for more information on their gift annuity services.

Marketing Gift Annuities


If your organization will be marketing gift annuities on its own, consider its print, web site and e-mail marketing approaches.

1. Print Marketing

Traditionally, planned gifts marketing relied on quarterly print newsletters and brochures to market and close planned gifts. With the advent of the Internet and growth of seniors on the web (over 65% now use the Internet), print publications should now be integrated with your organization's overall eMarketing program. Brochures and newsletter articles should make reference to your organization's short web address and include a place to collect e-mails for distribution. Your organization may also use literature such as postcards advertising current and deferred gift annuities as a means to drive donors to your organization's web site to read an article on gift annuities.

2. Web Site Marketing

One of the best ways to market gift annuities on your organization's web site is by telling a story. Stories should be written in a way that tugs on donors' heartstrings and motivates them to support the organization's mission by setting up a gift annuity. Interactive calculators that permit donors to run full color web illustrations of current and deferred annuities with their own particular property can also convince a donor of the benefits. Sometimes a donor will run an online illustration which motivates them to contact the gift planner and set up a gift annuity. These donors may be ready to make the gift based on the proposal, which explained their annuity rate and payout, emphasized the charitable deduction and that part of their payment could even be tax-free!

3. E-mail Marketing

eNewsletters are the best way to drive donors to your organization's web site. Include a link to the web site on all e-mails, that encourages donors to click onto the site and read more information. The more e-mail contacts your organization make, the more donors will visit the site on a weekly or daily basis. The organizations that we work with who have the most e-mail contacts are the ones closing the most gifts.

Your organization may consider segmenting its e-mail list and sending out e-mails to senior donors letting them know their potential annuity rates and tax-free income for a gift of $10,000 or more to set up an annuity. If these e-mails are linked to our web site, donors can log on and read the gift annuity donor stories or run a calculator presentation and learn more about the benefits of establishing a gift annuity.

4. eMarketing as a System

Marketing consultants and authorities will tell you that no one marketing tool is the magic bullet. You have to utilize your entire marketing medium including print, web and e-mail together in a systematic approach to effectively reach your donors. This means that all marketing should have your organization's look, colors and feel, include your organization's logo and highlight your organizational mission. Most organizations get to the point doing marketing completely on their own is not time or cost effective. If this is your case, consider using an outside provider to create an entire marketing package unique to your organization. Crescendo's fully integrated GiftLegacy eMarketing system can help you market and close more gift annuities. For more information on GiftLegacy eMarketing, please call Crescendo.

Illustrating and Closing the Gift


If your organization is illustrating and closing gift annuities in-house, it will need powerful software like CresPro or CresLite to help generate a convincing and accurate donor proposal. The proposals include a simple and detailed flow chart that explains to the donor in easy-to-understand terms the benefits of setting up a gift annuity with your organization including fixed payouts at high rates, possible tax-free income and a charitable deduction. For donors who wish to retire at a future date, you might consider illustrating a deferred gift annuity. For donors who want to be flexible about their retirement date, there is the ability to run a flexible annuity illustration. CresPro or CresLite Software also includes the 50-state gift annuity agreements (with state-specific language) that your donor will need to sign to establish the annuity. Remember that all Crescendo software is available for a 90-day free trial period.

Conclusion


As you can see, gift annuity management is challenging, but can be easier if your organization has the proper tools, management and structure in place. Choosing to offer gift annuities allows the organization to form lifelong ties with donors and benefit from the gifts received that help further the organization's work. For more information on gift annuity illustration tools, marketing program and administration services offered by Crescendo, please give us a call at (800) 858-9154. We wish you success with your gift annuity program!

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