Editors’ Note: Ronald A. Brown provides a history of charitable gift annuities, based on his new book, A History of Charitable Gift Planning: How Gift Annuities Shaped American Philanthropy (1830-1959).
In the ecosystem of American philanthropy, money is not only given, it is actively raised. There are only a few major histories of charitable fundraising, and they are incomplete: they include little or no mention of planned gifts, which require specialized legal and financial services by professional advisors (such as attorneys, trust officers, financial planners, and investment managers), and often by gift-planning staff at nonprofit organizations. Planned gifts include bequests, charitable remainder trusts, charitable lead trusts, pooled income funds, gifts of complex assets (such as real estate and closely-held stock), gift annuity contracts, and other sophisticated gift arrangements.
Charitable gift annuities have had a disproportionate impact on the practice of planned giving, since it was through gift annuities that nonprofits first acquired the intellectual capital needed to manage planned-giving programs that maintain a complex balance of interests among donors, income beneficiaries, and philanthropic service providers.
Gift annuities are well-known to many American donors and nonprofit organizations: in exchange for a gift, a nonprofit provides fixed payments for one or two people’s lives. The remaining amount kept by the nonprofit (residuum) after making annuity payments funds emergency shelters, medical services, education, environmental conservation, churches and synagogues, and many other philanthropic services.
About four thousand American nonprofits issue gift annuity contracts. The current value of gift annuity reserve funds under management is more than $3 billion, though that is a snapshot of a dynamic process: money flows in to nonprofit reserve funds from gifts, is invested, and flows out after the passing of an annuitant, to be used for providing services.
There are many risks involved with gift annuity programs. Nonprofit gift annuity program managers grapple with two great unknowns: the lifespans of their annuitants and the performance of investment markets over time. Gift annuities are designed to pay out more than can be earned through investments over the span of annuitant lives, but not too much more: payment rates assume that, on average, 50% of the original amount given to a nonprofit will remain upon an annuitant’s death. When a payment rate is too high, or an annuitant lives much longer than expected, the nonprofit issuing an annuity contract is legally obligated to continue making payments, even after a particular annuity account is exhausted. Nonprofits need to know whether enough money will remain at the end of an annuitant’s life to make an annuity program worthwhile.
From an annuitant’s perspective, it is extremely important that the nonprofit organization can be trusted to make its required payments. Most annuitants can’t afford to make sizeable gifts unless they receive income in return, so payment rates must be high enough to attract new gifts. Of course, the higher the payment rate, the lower the amount of money that will remain to support philanthropic services.
The professionalization of gift annuity programs can be traced to a national conference on philanthropy held in Atlantic City on March 22-24, 1927 that brought together leading bankers, economists, attorneys, life insurance agents, public officials, marketing experts, and nonprofit officers that shined a spotlight on abusive practices that today fall outside widely-accepted best practices or are actually illegal: advertising gifts as if they were investment bonds; making annuity payments from current operating income without a dedicated reserve fund; competing for donors by raising payment rates to unsafe levels.
Members of the business and professional community agreed to help elevate the operating standards of gift annuity programs by introducing sound business practices. A full-blown plan to manage longevity and investment risks in gift annuity programs was introduced by the actuary George Augustus Huggins at a hastily-convened national conference held one month later.
Huggins proposed practices that we now take for granted: advertising that makes clear the philanthropic purposes of gift annuities; measuring annuitant longevity; calculating payment rates by targeting a charitable residuum; developing statistical norms to guide decision-making; and valuing charitable and beneficiary interests using financial assumptions grounded in investment experience and expert economic projections.
For the first time, leaders of independent, nonprofit fundraising programs accepted a voluntary set of national best practices in gift annuity rate-setting, marketing, and fund accounting. The complexity of the new actuarial system, the demand for valid national data on gift annuitant mortality and average amount remaining for philanthropic purposes (which is still gathered today by nonprofits, not by federal or state governments), and the need for reliable investment assumptions required well-trained staff at nonprofit organizations. The profession of charitable gift planning was born.
The introduction of scientific methods in a voluntary national risk management system for gift annuity programs is a landmark in the history of American philanthropy. My recent book A History of Charitable Gift Planning: How Gift Annuities Shaped American Philanthropy (1830-1959) describes the origins and development of this uniquely American voluntary system, which, until now, had escaped the notice of historians, and remains a fertile area for research.
Robust laws, regulations, and judicial decisions protecting the interests of annuitants and the nonprofits that issue annuity contracts are recent developments. These and many other federal and state policies resulted from a dialogue with practices in the nonprofit sector. In the absence of statutory law, American nonprofit organizations raised money by issuing annuity contracts as early as 1831. New York became the first state to recognize the legal validity of gift annuity contracts in its Insurance Law of 1925, but the form and substance of modern nonprofit gift annuity contracts are grounded in common law of ancient origin.
The roots of modern gift annuities are deep. Annuity contracts were in common use for more than a thousand years before a philanthropic purpose was added. For example, an Egyptian annuity contract dating from 363 BC guarantees a new wife specific lifetime benefits for her maintenance, backed up by her husband’s entire estate. A handbook known as the Hermopolis Legal Code spelled out the rules for such contracts.
Annuity contracts were so prevalent in ancient Rome that they were regulated by inheritance laws (the Lex Falcidia) to protect the financial interests of surviving family members. In the 3rd century AD, an attorney named Domitius Ulpianus reported the creation of a new mortality table with a high standard of accuracy for valuing annuity interests. The Romans gave us the term now used for the philanthropic portion of a gift annuity: the residuum.
Annuity contracts known as corrodies provided English annuitants with specific life benefits, such as lodging, meals, drink, and sometimes cash payments, in exchange for a gift to a church, hospital, monastery, or other philanthropic organization. Corrodies were in common use from about 1000-1500 AD.
In 1831, John Trumbull gave more than 50 of his best paintings to Yale in exchange for a $1,000 annuity. Like most annuitants, Trumbull could not afford to make this gift without receiving payments back. Our most familiar images of the men, women, and events of the American Revolution, such as The Battle of Bunker’s Hill and The Declaration of Independence, were preserved as a collection through this gift annuity.
As far as is now known, this was the first gift annuity contract in the U.S. Innovative contracts created by attorney Peter Augustus Jay (son of U.S. Supreme Court Chief Justice John Jay) became templates for American nonprofits for more than 100 years. Thanks to a groundbreaking legal defense of gift annuities by Luther Bradish in 1848, the American Bible Society became a national leader in the practice. A marketing campaign by the Bible Society resulted in 4,615 annuity contracts between 1920-1930.
Other nonprofits leaped into gift annuity programs during the Roaring Twenties without adequate safeguards, leading to the new national actuarial system described above. By Huggins’s last annuity conference in 1959, a voluntary Committee on Gift Annuities had virtually eliminated competition over annuity rates and had introduced best practices for ethical marketing, accounting, investment of reserves, and compliance with federal and state laws, regulations, and court decisions.
The Conferences on Gift Annuities have become the longest-running series of professional conferences focused on philanthropy: the 33rd Conference on Gift Annuities will meet in Seattle on April 25-27, 2018. These continue to draw together bankers, economists, attorneys, life insurance providers, specialized marketing firms, public regulators, and nonprofit leaders for cutting-edge presentations, networking, and research, and to update and affirm the significance of a philanthropic practice with deep historical roots.
-Ronald A. Brown
Ronald Brown is an independent scholar living in Manhattan. He practiced gift
planning at Princeton University, Columbia, Fordham, United Way of America,
and the National Wildlife Federation, and was a board member and chair of the
Research Committee for the American Council on Gift Annuities.