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Posted June 6th, 2017

Let’s Take a Look at Gift Annuities, Part 3

There’s one more gift annuity topic we need to consider: the application of federal securities laws to a gift annuity program. This is a two-part discussion.

Part 1 is the fact that the 1995 Philanthropy Protection Act (“PPA”), which grew out of a Texas gift annuity transaction, applies federal securities laws to certain planned gift arrangements, including gift annuities. Specifically, the 1995 PPA provides that a charity’s “reserve fund” for gift annuities must be described to gift annuity donors in a disclosure statement. The 1995 act does not prescribe the contents of the disclosure statement; and charities are all over the lot in terms of their CGA disclosure statements.

Part 2 is potentially a much bigger deal. Part 2 is the fact that, in 2009, the Ninth Circuit Court of Appeals held in Warfield v. Bestgen that gift annuities being marketed by a certain charity were “investment contracts” for federal securities law purposes. This meant each and every gift annuity issued by the charity was a registrable security. This holding goes far beyond and has far greater implications for gift annuity programs than the 1995 PPA.

Why did the Ninth Circuit hold this? The holding is based on how the gift annuities were being marketed. The marketing brochures did discuss how the “residue” remaining when annuity payments terminated would be devoted to the donor’s charitable purposes. This was no problem, of course.

The marketing brochures also played up the gift annuity payment rates, income tax savings and capital gains tax benefits in investment-oriented language. The Ninth Circuit said these tax and financial inducements appealed to the investment “appetite” (my word) within the prospective donor.

Appealing to such “appetite,” according to the Court, is largely what makes a security a security. [The other elements of a security are (a) the pooling of assets for investment purposes, which occurs within a CGA reserve fund; and (b) the expectation of profit, which can and sometimes does come to fruition when gift annuity recipients live beyond “life expectancy.”]

So, there we have it … so far. If you are unsure about the approach your organization is taking to market gift annuities, check with your Sharpe Group rep. It might be a good reality check.

by: Jon Tidd

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