Changes in New York's Charitable Gift Annuity Regulations
These changes probably effect you if you have an annuity program

Breaking news: Charitable Regulation is Coming
California's Nonprofit Integrity Act has implications for us all

Against the Grain
Bequests Can be Irrevocable

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“New York is now recognized as the last state in the country to allow other appreciated assets, including real estate, to fund gift annuities”

Two of last year's changes are noteworthy if your institution offers Charitable Gift Annuities, regardless of where you are located. The first brings New York State up to where all the other states have been by permitting any appreciated property, not just securities and including real estate, to fund a gift annuity. The next is a process change that effects any organization seeking to write annuity agreements in New York.

New York used to allow only cash or marketable securities into any gift annuity program that had a New York State connection: donor, annuitant or non-profit located in the Empire State. This notoriously regulated (some might say “arrogant”) state required every gift annuity agreement in any program with just a single New York connection to explicitly state that those were the only acceptable assets for every Charitable Gift Annuity.

New York is now recognized as the last state in the country to allow other appreciated assets, including real estate, to fund gift annuities.

If you have any New York connection to your program, you may amend your agreements by removing the previously required statement that you “accept only cash and marketable securities in return for a charitable gift annuity.”

The discussion around whether to accept other assets will hopefully start with your development office and CFO, perhaps requiring the approval of your CEO and trustees. The issues for discussion include valuation and appraisals, due diligence (particularly for real estate), whether your annuitant base is large enough to support an asset that may not give immediate liquidity, your program manager's ability to accept illiquid assets and how your non-profit's marketing efforts will support the change.

For valuation and appraisals, I suggest you become familiar with the IRS Regulation concerning “qualified appraisals.” You'll find that in Internal Revenue Regulation § 1.170A-13(c).

I could dedicate an entire newsletter or seminar to these topics. I hope this is enough to expose you to the issues around accepting appreciated property and get your organization started with its consideration of them. Finally, remember to reflect any changes in your gift acceptance policy. You want that to always describe the current state of your program.

The other change to New York State gift annuities law concerns process. The Department of Insurance must grant permission to issue gift annuities in the State before you can write your first one in, or from, New York. That permission comes in the form of an exemption from regulation as a commercial issuer of annuities. It used to be acceptable for a non-profit to issue annuities up to a certain threshold and then apply for the exemption. That has changed. Now, your institution must secure the exemption before writing any annuity if you're based in New York and before writing an annuity with a New York donor or annuitant if you are based outside New York. I♥NY

“I think [California's Nonprofit Integrity Act] signals imminent non-profit regulation nationwide. ”

In 2002 many non-profits worked through the implications of the Sarbanes-Oxley legislation when it passed. Some of that work continues. The law explicitly applies only to for-profit entities, but forward looking non-profits saw the need to look at their own governance and oversight and tighten things up to eliminate conflicts of interest and become more transparent.

California has made this exercise mandatory for many non-profits with the Nonprofit Integrity Act. It was signed by Governor Schwarzenegger in September and became law on January 1st. I think it signals imminent non-profit regulation nationwide.

The Act contains many requirements for officer compensation, audit functions, financial statements, board structure and contracts with commercial fundraisers or fundraising counsel. For instance, non-profits must:

• make available for public inspection outside-audited annual financial statements
• include an audit committee (with restrictions on its members) on their board
• perform periodic review of the CEO's and CFO's compensation
• register with the Attorney General
• comply with several requirements for contracts with consultants
• pay late fees and face civil penalties for non-compliance

Not all the Act's provisions apply to all non-profits. The first two bullets apply only to non-profits (and trusts) whose gross revenue exceeds $2 million per year. The other bullets apply to all non-profits as well as commercial fundraisers or fundraising counsel who earn in excess of $25,000 per year. I find it interesting that “religious organizations, educational institutions, hospitals, [and] health care service plans” are entirely exempt. The Act contains many more provisions and you can see a summary of them here from the California Association of Nonprofits, which opposed the Act.

The burning question is whether this law applies to non-profits outside The Golden State that raise money from California residents. It specifically applies to “legal entities holding property for charitable purposes . . . over which the state or the Attorney General has enforcement or supervisory powers.”

“Thus, if your organization isn't exempt and has California prospects who you solicit by means other than your website, you must register there to comply with the Nonprofit Integrity Act.”

I corresponded with the Attorney General's office to ask how this is being interpreted.

That office has enforcement power over non-profits that “do business” in California and they consider soliciting donations from California residents as “doing business” in their state. Quoting from the A.G.'s office,

“Soliciting donations from California residents would constitute doing business in California so registration would be required unless the foreign nonprofit receives contributions only because donors log onto the organization's website. Such "passive" solicitation does not constitute doing business. ”

Thus, if your organization isn't exempt and has California prospects who you solicit by means other than your website, you must register there to comply with the Nonprofit Integrity Act.

I think more regulation will come from other states. I don't believe the mandatory corporate responsibility movement will restrict itself to our for-profit counterparts. And, there's a good chance we will see states sharing registration information, so if your institution registers in one state, other states could look for you.

There is work to do immediately if you actively solicit California donors and there is considerably more coming in the years ahead.

Expect Martignetti Planned Giving Advisors to be a leader in understanding and counseling on the latest developments nationwide.

“[B]equests need not remain revocable.”

I talked about recognition and stewardship of revocable gifts in the last issue, where I recommended not requesting documentation for such gifts, most of which are bequests. Recall, the revocable gifts are those your donor can take back if they change their mind.

But bequests need not remain revocable.

I have had considerable success in many instances using “testamentary contracts,” known by some as “contracts to make a will.” Every state recognizes these contracts as valid and legally enforceable, with a few states having stricter requirements than the majority.

A testamentary contract binds the donor's estate to make a gift of a certain amount, a certain percentage of the residuary estate (what remains after specific bequests, death expenses, taxes and estate administration expenses have been paid), or the greater or lesser of these.

Your donor signs the contract and gives your organization a small sum as a binder, called “consideration.” Consideration has legal significance as one way of enforcing the agreement. In relying on your donor's promise, you must perform some simple administrative actions and doing so creates an additional layer of enforceability. A representative of your organization signs as well.

Your donor has now obligated their estate to make a gift of the agreed amount or percentage to your institution. If it does not, your institution has a breach of contract action against the estate. That is a step you might be loathe to take, as I discussed in the last issue around the new Donor Managed Investment (DMI) gifts (see that issue), so you should not approach every bequest donor with the idea of a testamentary contract. I counsel clients carefully about whom these are appropriate for.

However, where you have a close relationship, and especially where a donor seeks campaign credit or other lifetime recognition for a gift in their will, the testamentary contract is a powerful tool.

• What's this Martignetti Planned Giving Advisors all about?
  It's a company I founded in anticipation of having more consulting work than I can do myself. I will have to engage other Planned Giving professionals to work for me. You can see more information, including a list of current clients and an archive of The Martignetti Report, at the company website, www.mpgadv.com.


• With gratitude, I announce that The College of New Rochelle is my newest client. I am pleased to be working closely with Carole Weaver, Ph.D., Director of Major and Planned Giving, to help the College expand their Planned Giving program.


• Martignetti Planned Giving Advisors is recognized internationally as we have been selected as an international partner of Australia's Malian Foundation. We are the only Planned Giving consultancy recommended by the Foundation to its 420 grant recipients all over the world.


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Tony Martignetti, Esq.
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Martignetti Planned Giving Advisors

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