Administrative Practice Letter V-D

Subject: Charitable Gift Annuities

Issue 2

Effective 7/14/06

Overview

A Charitable Gift Annuity (CGA) is an irrevocable contract in which a donor transfers cash or property to a charity in exchange for a commitment by the charity to pay up to two beneficiaries a fixed and guaranteed periodic payment for the remainder of the beneficiaries’ lifetimes. The annuity payments can either begin immediately or be deferred for a period specified by the donor. CGAs are available to all campuses and are administered centrally by the University of Maine System (UMS) Office. A charitable gift annuity is considered a general obligation of UMS, and the present value of the future annuity payments to the beneficiaries is recorded as a liability. The difference between the assets transferred from the donor and the related annuity liability is recognized as the contribution. Annuity payments must be made regardless of actual earnings or the remaining principal balance of the gift annuity.

Annuity rates may be negotiated but are generally calculated to net at least fifty percent of the original principal balance to the charity upon termination of the contract. UMS uses the American Council on Gift Annuities suggested rates. The rates offered to the donors depend on the age of the beneficiaries, the date of the gift, and the date income is scheduled to begin. Usually there are no restrictions on the residuum other than to the campus of choice. Should the donor want to restrict the residuum further, the respective campus’ administration and the System-Wide Services Office of Finance & Treasurer (OFT) shall be consulted and an addendum shall be attached to the Agreement.

Benefits to Donor

Provides a fixed income stream for the life of up to two beneficiaries.
Gives an immediate federal income tax charitable deduction to the donor.
Annuity payments are only partially subject to income tax.
May result in reduced probate and estate taxes.
Provides a means to meet charitable objectives. Allows donation of a small gift that may not justify more complicated arrangements.

Gift Acceptance Criteria

The minimum gift shall be $10,000 for a current annuity and $5,000 for a deferred annuity. The minimum additional charitable gift annuity (separate contract) from the same donor is $2,500.
The Agreement is written for the fair market value of the gift transferred.
The minimum beneficiary age for a current annuity shall be 60 and for a deferred annuity, 50.
For a two-life gift annuity, the younger beneficiary must be at least 60 years of age.
The annuity contract shall be written for one or two beneficiaries only.
UMS uses the American Council on Gift Annuities suggested rates, or lower rates, if the donor agrees.
Acceptable gift assets include: cash, appreciated securities and in rare cases, marketable real property. • The donor may specify the use of the residuum (gift can be restricted).
The UMS or one of its universities is the sole remainderman.
The entire gift shall be invested until the demise of the last income annuitant with a unique account number and contract number.

Types of Gift Annuities

Current

A current gift annuity begins to make payments to the beneficiaries at the end of the payment period immediately following the date of contribution. The first payment is prorated from the later of the date of the contribution or the date of the signing of the disclosure statement to the end of the first period. This payment will typically be a smaller amount than subsequent payments.

Deferred

With a deferred gift annuity, the payments to the beneficiaries begin on a future date determined by the donor and set forth in the gift annuity contract. This date must be more than one year after the date of contribution. Because the payments are deferred, the beneficiaries will receive a higher income.

Administration

Gift annuity gifts are invested as part of the UMS Endowment Fund. The System-Wide Services (SWS) Accounting Department is responsible for making the annuity payments to the beneficiaries by the payment due dates and for issuing the 1099R annual tax forms. Payments to beneficiaries are made no more frequently than quarterly.

The tracking of donor/beneficiary addresses and other maintenance of the donor gift annuity database are performed by staff in OFT. Additionally, OFT staff will prepare the CGA proposals (Exhibit I) that development officers provide to donors when discussing CGAs. The OFT staff also prepares the Gift Annuity Agreements/Schedule A (Exhibit II) and Disclosure Statements (Exhibit III) that are provided to donors after an agreement has been reached.

Neither the development officers, OFT staff, nor any consultant who may be involved should provide tax, estate or financial planning advice to potential donors or beneficiaries. The development officer should advise the donor to contact a Financial Advisor or attorney prior to engaging in a CGA.

The University of Maine System’s Charitable Gift Annuity Program was developed in accordance with Maine law, and is substantially compliant with the regulatory requirements of most other states. Because there is no federal code that regulates charitable gift annuities and the various state laws are varied and evolving, UMS will exert its best efforts to be in substantial compliance with the laws of the various states in which UMS’s charitable gift annuity donors are domiciled.

Procedures

When development officers receive an inquiry from a potential CGA donor, they should complete a Charitable Gift Annuity Application (Exhibit IV), which facilitates the collection of the information required for the purpose of preparing a proposal.

If the donor insists on further restrictions on the gift (in addition to having the residuum benefit a specific campus), the development officer should consult with appropriate campus administrators (including the campus President) and the OFT for approval of the requested restriction. Upon approval, a Gift Annuity Addendum should be prepared (see Exhibit V for sample). The gift annuity application should then be sent to the OFT for the preparation of a Gift Annuity proposal. Several proposals may be required before the development officer reaches an agreement with the donor.

After the donor has accepted a proposal, copies of the final Charitable Gift Annuity application, and the Addendum (if any) should be sent to the OFT.

If the donor will be using securities to establish the gift annuity, the development officer should contact the donor’s broker to transfer the securities to the UMS account at E*TRADE (see APL #53). The amount of the gift for the purpose of the Charitable Gift Annuity Agreement is the average of the high and the low selling price of the security on the date of transfer. The date of transfer is the date the securities are electronically transferred to the UMS account at E*TRADE, or the date paper certificates are delivered to the development officer (see APL #53). Development officers should contact the OFT for specific stock trade details (e.g., date of transfer, net proceeds).

The Office of Finance and Treasurer will send the following to the campus Development Officer:

The original Gift Annuity Agreement signed by the Chief Financial Officer and Treasurer (if the annuity is to be funded with stock, the Gift Annuity Agreement cannot be prepared until the stock transfer has taken place. This is because the value of the stock on the date of transfer is the value that is used to establish the value of the gift in the Gift Annuity Agreement.)
Schedule A (which lists the amount and type of assets to be contributed),
An Addendum (if applicable),
An unsigned Disclosure Statement
Two color copies of the CGA proposal. After the university development officer receives the donor’s check or stock transfer, the Development Officer:
Will give the donor the original Gift Annuity Agreement and Schedule A
Will have the donor(s) sign the Disclosure Statement and the Addendum (if applicable)
Provide the donor with a copy of the Disclosure Statement and Addendum.

The development officer then forwards any gift annuity funds to the Office of Finance and Treasurer by certified mail along with the original signed Disclosure Statement and any applicable Addendum.

The university development officer will send an acknowledgement letter to the donor as soon as possible after all paperwork has been completed.

Annuity Payments

Annuity payments will be made no more frequently than quarterly. Payment dates for the UMS charitable gift annuity program are September 30, December 31, March 31, and June 30.

Payments for current gift annuities shall begin at the end of the payment period immediately following the date of the contribution. The SWS Accounting Department will ensure that annuity payments are mailed to arrive by the payment due date. The check stub will indicate the annuity number for which the payment is being made. The first payment (usually a prorated amount) for each annuity will be mailed to the respective campus development officer. The development officer should send a letter to the donor along with the payment which explains that the first payment is a pro-rated payment, what the subsequent periodic payments will be (as reported in the Gift Annuity Agreement), and that future payments will be mailed directly to the beneficiaries from the SWS Accounting Department. The prorated amount is computed using the later of:

the date the Disclosure Statement is signed; or
the date of transfer and determining the number of days to the end of the first payment period.

Development Officers must communicate any donor address changes to the Finance Office.

When word is received of the annuitant’s/beneficiary’s death, the development officer should request a death certificate from the family or personal representative. If the income annuitant/beneficiary dies on or after the payment due date, the payment belongs to the beneficiary. If the income beneficiary dies prior to the due date but after the payment has been mailed, insurance regulations require that a reasonable effort must be made to retrieve a refund from the donor’s estate. Once a death certificate is received, the remainder of the annuity shall be distributed to the UMS entity so designated in the Agreement.

Exhibit VI provides a checklist of steps for establishing a Charitable Gift Annuity.