Charitable Gift Annuities
Since the 1960’s, the National Heritage Foundation has promoted “charitable split-dollar life insurance.” The IRS put a stop to these abusive transactions, and the foundation lost a $6+ Million lawsuit last year. The suit involved the foundation’s attempt ti substitute itself as the beneficiary under three life insurance policies. The foundation declared bankruptcy, suspending payments on its annuitants. A bankruptcy court in Virginia later allowed the liquidation of the majority of the foundation’s assets to compensate the annuities.
The Mid-American Foundation masqueraded as a charity and sold charitable gift annuities under commissioned investment advisers. The foundation was actually a Ponzi scheme that scammed its participants out of over $50 million. The foundation imploded in 2001, leaving behind numerous lawsuits in its wake. In one case from the 9th Circuit, Warfield v. Alaniz (569 F3d 1015), the court applied the Howey test and concluded that the charitable gift annuities were investment contracts. The court emphasized the foundation’s marketing materials’ focus on the income participants would receive, as opposed to the philanthropic considerations. The court also held that the Philanthropy Protection Act of 1995 did not exempt charitable gift annuities.
If a client is considering a charitable gift annuity, makes sure the client receives a Disclosure Statement from the charity. Additionally, verify that the charity is registered with the Insurance or Securities Commission, and check the charity’s recent IRS From 990 for information on its spending practices. Lastly, ensure that the gift is facilitated only by salaried employees or volunteers.
See Sheila A. Hard, Charitable Gift Annuities: Due Diligence for Advisors, Wealth Strategies Journal, Apr. 6, 2011.
Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.