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In order to fully understand the nature of the Metamor Charitable Funding model, a review of the most popular, current giving transaction is a critical imperative.
Charitable Gift Annuities vs. Pooled Income Funds
A Charitable Gift Annuity (CGA) is a contract (not a Trust) under which a charity / 501(c)3 nonprofit organization, in return for a transfer of cash, marketable securities or other property, agrees to pay a fixed sum of money each year (payments) for the lifetime of one or joint lives of two donors.
The person who receives the payments (the donor from the charity) is called the annuitant or beneficiary. The payments (called the annuity) are fixed and unchanged for the term of the contract. For tax purposes, the annuity payments are not entirely income, because a portion of each payment is considered to be a partial tax-free return of the donor's gift, which is spread proportionately over the payments expected to be made over the life expectancy of the annuitant.
The contributed property (gift), given irrevocably, becomes part of the charity’s assets, and the payments are a general obligation of the charity. The annuity is backed by the charity’s entire assets, not just by the property contributed. Unlike a trust, annuity payments continue for the life/lives of the annuitant, and not only as long as the assets remain in the Gift Annuity Fund.
Pooled Income Funds
While commonly marketed as an annuity, the most popular current business model is in fact, not an insurance annuity at all. Rather, it is a pooled income fund, managed by a banking institution, and their financial analysts or portfolio managers.
In exchange for a charitable donation, the nonprofit organization agrees to pay a fixed payment for the life, or joint lives, of the donor(s). Payments are determined in concert with industry guidelines suggested by the American Council on Gift Annuities, as well as the age of the donor(s) at the time the gift is given. Donors are able to recognize a tax deduction in the year the gift is transacted, equal to the difference between the donation made and the anticipated value of the lifetime payments, (i.e.: if the donor makes a $100,000 donation in exchange for an annuity that projects to pay him $50,000 over his remaining life span, the deduction this tax year will be roughly $50,000). The annual payments received by the donor are pro rated on a tax free and ordinary income basis, a further benefit to making a CGA.
Charities, in turn, hope that the investment vehicle established by their portfolio manager will create enough income, to not only meet the agreed upon annual obligation to the donor, but also leave a remainder, upon the donor’s death, to be received by the charity for their agreed upon use. It is a process full of great intention, but wrought with risk, for both the charity and the donor, and minimal advantage for the issuing charity. Aside from the fact that the current pooled income fund model does not create any immediate revenue for the delivery of essential goods and services by the issuing charity, there are also management fees to be paid (typically 25 basis points per quarter) and market risks associated with the investment strategies that could put the charity in a precarious position if yields do not keep pace with the promise to pay.
CHANGE IS NEEDED
Charities cannot continue with business as usual. Markets are too volatile and development professionals cannot expose their organizations to potential shortfalls which will cause their development and operational budgets to be upside down.
The Metamor model offers a commercial annuity product, while adhering to all ACGA guidelines, creating immediate revenue for the issuing charity, guaranteed annuity payments for the life of the donor and the potential for a lump sum, Legacy Refund, payment upon the donors future death.
To learn more about how your organization can benefit by working with Metamor Charitable Funding, visit "The Metamor Model" or contact us today.
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