By Mike Gricius, Senior Manager
When it comes to supporting your mission, charitable gift annuities (CGAs) can be an appealing option for both nonprofits and their donors.
For nonprofits, these arrangements can deepen donor relationships and provide long-term stability; however, CGAs also have administrative responsibilities and financial risks.
In this article, we’ll walk through the key advantages and potential challenges of offering charitable gift annuities so your organization can determine whether they fit your giving strategy.
What are Charitable Gift Annuities?
Charitable Gift Annuities (CGAs) are a form of planned giving in which a donor contributes a charitable donation to an organization. In return, the organization agrees to provide a fixed, recurring income to a designated beneficiary for a specified period or the remainder of the beneficiary’s life.
Advantages of Charitable Gift Annuities
Charitable gift annuities can be valuable in a nonprofit’s fundraising strategy because they represent a long-term commitment between your organization and its donors.
Some of the advantages of this gifting model include:
New Donor Opportunities
CGAs can attract a new segment of donors and foster long-term relationships, since they often attract individuals who want to give generously but also need financial security.
Steady Income for Donors
This type of charitable gift is beneficial for donors because it allows them to receive a reliable income stream while supporting a cause they care about.
Larger Contributions
The fixed income aspect may encourage more substantial donations, as it is not affected by market fluctuations.
Legacy Impact
If managed and invested properly, the remaining assets after the CGA term has ended can contribute to the organization’s long-term growth. This allows the donors’ contributions to create a lasting legacy.
Disadvantages of Charitable Gift Annuities
Although CGAs have some exciting benefits, they also create many risks for nonprofit organizations. The disadvantages may outweigh the potential benefits if not approached with careful planning and oversight.
Some of the most important disadvantages of this gifting strategy include:
Binding Financial Obligation & Market Risk
The biggest factor that nonprofits need to consider is that their organization is legally obligated to make fixed annuity payments to the beneficiary regardless of financial difficulties or if investment returns underperform. This obligation does not go away until the term expires.
Inflation Risk
Fixed payments do not adjust for inflation, potentially reducing the value of the gift over time. Because of this, nonprofits considering CGAs may need to be more conservative in their own forecasting when considering the true impact and purchasing power that this type of gift might have on their organization in the future.
Longevity Risk
The organization may face financial strain if beneficiaries live longer than expected due to the required payment obligations. Your organization must maintain a strong financial position to ensure that payment obligations can be met.
Each organization has a different risk tolerance level, so it is essential to fully understand the pros and cons of charitable gift annuities before deciding if they are right for your organization.
If you want to explore whether Charitable Gift Annuities are right for your nonprofit organization, we encourage you to contact your local Blue & Co. advisor today.
