26 | PENTA | December 2020
M
ove over, charitable
trusts. Make way for the
charitable gift annuity.
Typically viewed
as entry-level gifting
methods thanks to low minimum contri-
bution amounts, low cost, and simplicity,
charitable gift annuities have had a
spike in inflows from wealthy donors
lately. According to a BNY Mellon
Wealth Management study, in 2019,
assets in gift annuities were up 21%
over the prior year, and the average gift
was 56% larger. Assets continued to
flow into charitable trusts, but at only a
slightly higher level than in 2018.
The surge in popularity in gift annu-
ities is likely a result of people’s desire
for a guaranteed lifetime annuity at
a time when yields are at historic lows
in the fixed-income market, and a
hesitation to sock money into a charitable
remainder annuity trust (CRAT).
A CRAT is the gift annuity’s equivalent
in the trust world, and typically a
popular tool. But ultralow interest rates
and high valuations in the stock
market make for a lousy environment
for CRATs, says Crystal Thompkins,
national director of gift planning
services at BNY Mellon Wealth Manage-
ment, who expects gift annuities’
popularity to extend through this year.
As winds shift in the economy, the
markets, and regulatory environment,
it’s not uncommon for the popularity of
different charitable planning tools to
rise and fall. Given the surge in popu-
larity of gift annuities, it’s worth a look
at how they size up these days relative
to their closest charitable trust cousin.
Charitable Gift Annuities
A charitable gift annuity is a simple
contract guaranteeing that if you give
a nonprofit organization a lump sum,
it will pay you a fixed, lifetime annuity
based on actuarial factors—a host of
market factors combined with your life
expectancy. Minimum donations are
around $2,000 and, unlike a trust, no
attorney is required to set one up (hence
no attorney fees).
Even if you live beyond your life
expectancy, after your lump-sum equiv-
alent has been paid out, you continue
to receive the annuity. Depending on the
contract, the annuity can continue to
pay out to a surviving spouse. If you
and your spouse die before your lump
sum has been paid out, the charity
keeps the balance in its coffers.
Payments can be deferred, which
increases the amount paid out in the
future annuity. A partial donation for
the gift can be taken upfront. Capital
gains taxes on the growth of underlying
assets are spread over the annuity
payments. When interest rates are low,
the future capital gains’ bite out of
annuity payments is lower, leaving
more intact as income, Thompkins says.
Nonprofit groups that offer charita-
ble annuities have large infrastructures,
such as museums and universities.
“We’re talking those with hundreds
of millions in assets that are segregated
to support their annuity programs,”
Thompkins says. “These are diverse
pools designed to absorb potential risk.
It’s like managing a pension.”
The downside is that not all nonprofits
offer gift annuities, and they aren’t
customized, says Pam Lucina, chief
fiduciary officer at Northern Trust.
Charitable Remainder Trusts
In contrast, trusts can pay out to a
number of different charities, over
a specified period of time instead of a
lifetime, and can be used to transfer
assets to heirs. The CRAT is the most
similar to a gift annuity: It turns a lump
sum into an annuity, and what’s left at
the end goes to charity—at least 10%
of assets transferred to the trust is
required to be left as a gift.
But the CRAT has lost its luster
lately, Thompkins says. The annuity
and future gift are dependent on the
high probability of the underlying
invested assets performing within
certain parameters. With stock market
valuations high, and the economy in
ragged shape due to Covid-19, there’s
good reason for concern that the market
could enter a sustained bear market.
“In 2008 and 2009, there were
trusts that were exhausted with no
benefit to either the charity or the
donor,” Thompkins says. “Many people
are leery now.”
“ These are
diverse pools
designed
to absorb
potential
risk. It’s like
managing a
pension. ”
Crystal
Thompkins
Charitable Gift
Annuities on the Rise
The simple, low-cost structure works well when
rates are low and stock valuations are high
By KAREN HUBE
Illustration by ROSE WONG