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Although the Partnership for Philanthropic Planning (formerly the National Committee on Planned Giving), the Association for Fundraising Professionals, and others have all developed ethical codes, we have little guidance on how to best apply them to everyday situations. It would be as if our country had only the Constitution and no case law to rely upon when making legal decisions. Yet inherent in philanthropic planning are many conflicts arising from the planning process that cloud the intentions of planners - both employees of nonprofits and for-profit advisors - and that at times confuse donors. As decisions made today can have consequences years, even decades, from now, we, who are most involved in the planning process, must at the outset be prepared to think through as many issues as possible in the complex world of philanthropic planning.

Acting ethically requires more than reacting on a gut level. In fact, reacting only on a gut level - no matter how “right” we may think it is - is actually irresponsible, and the result is frequently the opposite of ethics-based decision-making. While each person’s own credo of right and wrong plays a vital role in making ethical decisions, all too often dilemmas arise where more than one decision or course of action can be right as well as suspect. The key is to make difficult decisions with an understanding of why we make them, and then, to the best of our ability, to communicate our reasons.

Each month, the Partnership for Philanthropic Planning of Greater Philadelphia, in cooperation with the National Capital Gift Planning Council, will post real questions from real people answered by Doug White, a national leader in the philanthropic community. All identities, both of people and places, will be kept confidential. PPPGP members have the ability to share their comments on each monthly post since no one person has all of the answers. Members also have full access to the archive which includes both the posted dilemma and resolution, plus any comments made by members.

Latest Dilemma & Resolution (posted 07/26/2010)

Gift Annuity Reserves

Dilemma

We’ve had several gift annuities go south – south of south, actually, to the point where we have used up the original gift amount and now must make payments from other sources from within our gift annuity pool. That is, from other people’s gift assets. Is this right? How can we avoid doing this, as we are obligated by law to make payments, even if the original money is all gone?

Resolution

This shines a different light on the question about offering rates higher than those recommended by the American Council on Gift Annuities (see the July 2009 column). When I was introduced to planned giving (in the 1970s), everyone, as I recall it, said that a gift annuity was the “easy” gift, the gift that requires only a simple one- or two-page agreement and no messy trust language. There is no confusing four-tier taxation system, and the gift annuity generated a predictable income (it’s not “income” – those checks represent “payments,” but that’s another matter). Simple, no fuss planned giving.

Until it got complicated. Like when all those growth predictions went south.

Today, I know of many gift annuities that are, like many mortgages, under water; the asset base will ultimately not withstand the payments. For example, a seven percent payment on an asset that is now half as large as it was originally because of depleted investment returns is now a 14 percent payment. The life span of the asset representing the gift may be shorter than the life span of the annuitant. Why we get into these messes is a topic for another day, however; the issue now is what to do.

Whatever is done ought to be the result of a policy that addresses this situation. Most organizations don’t have such extensive policies, however, and, like you, are stuck between the need to make payments and the need to find a source for those payments.

If you pay from the reserve pool, you effectively reduce everyone else’s gift. All donors are affected and will eventually make a lesser gift than would otherwise be expected. How right is that? Perhaps that would be the best policy, however, bad as it may seem, if there were a policy that clearly spelled that out. That way everyone knows the deal before the gift is made. (Want to bet how many gift annuity disclosure statements address this issue?) Another possibility is to make the payments from another source, from somewhere in the operating budget – not that it would be a popular choice among those depending on the charity’s budget to fund their programs.

But what else can you do? The constant in the decision-making process is the absolute need to make the payments. From there you have options – but whatever you choose, you should do so with a rationale with which you are comfortable and which is outlined in a policy.

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This column appears courtesy of the National Capital Gift Planning Council and author Doug White, a nationally recognized speaker and writer on the subject of gift planning and ethics. To learn more about Doug and how to contact him, please click here.