The following case studies are representative examples of projects
we have completed over the last 24 months.
NON-CASH DONATIONS
1. Farm Land
Facts: A couple purchased a large tract of Arizona farm land
only a decade or so ago. In the past six months, they have
been receiving unsolicited offers from developers at nearly 10
times the original cost. The couple wanted to sell the property,
however they wanted to mitigate the capital gains tax exposure,
reduce their estate tax exposure, create a charitable fund for
themselves as well as future generations and needed some
retirement income as well.
Charitable Solution: Their attorney and financial advisor
crafted a plan that involved a 50% donation to a donor advised
fund, 25% to a Charitable Remainder Trust and 25% to be
retained by the couple. The charity was not comfortable
receiving an outright contribution of real estate so they referred
the gift to the Dechomai Foundation. Once the property is sold,
it will be transferred to the donor advised fund to be
professionally managed by the financial advisor. The
Charitable Remainder Trust will also be managed by the
financial advisor, and upon termination, the remainder will be
transferred to the family's donor advised fund. The couple was
very enthusiastic about the “legacy” component of a multiple
generation advised fund all while accomplishing both their
retirement income needs and their tax reduction goals.
2. Real Estate Limited Partnership
Facts: A donor owned an apartment building within a limited
partnership. He called a charity the day before he was to sign
a binding agreement to sell. He wished to give a 10% interest
to the charity toward a capital campaign.
Charitable Solution: The charity immediately referred the gift
to the Dechomai Foundation and we completed due diligence
on the partnership the same afternoon, Dechomai’s Board
approved receipt of the gift and the gift was irrevocable
transferred that evening. Dechomai’s fee was 2.3% of the gift
and the remainder was granted as a gift to the capital
campaign.
3. Professional Sports Franchise LLC
Facts: A professional advisor was representing a client who
owned a partial interest in a professional sports franchise. He
had a very low cost basis in the property and wanted to give a
small interest to charity.
Charitable Solution: The charity contacted Charitable
Solutions to help design and complete the gift. As the donor
wanted to make the gift very quickly, within five business days,
the charity referred the gift to the Dechomai Foundation. The
gift was liquidated for a total fee of 3% and 97 cents on the
dollar was granted to the referring charity 30 days after the
closing (note this is a donor advised fund grant so the donor ha
d the right of recommending the grant to any public charity he
wished).
4. Closely-Held C Corp
Facts: A CPA called a charity to determine if they would be
willing to accept a contribution of closely held C-corporation
stock. The company had an interest in redeeming the stock
back, but because of cash flow fluctuations, did not know if or
when an offer might be made.
Charitable Solution: The charity referred the gift to the
Dechomai Foundation for receipt. The company purchased
the shares for the appraised value six months after the transfer
using a three-year installment note. The note’s rate was 1 +
the prime rate and was reset annually. Dechomai’s fee was
2.8 percent and granted the remaining net payments to the
charity annually.
5. Art Work
Facts: A donor had amassed a substantial art collection. Two
pieces in particular were paintings the donor wished to sell.
He was aware that the federal capital gains taxes were 28%,
and as he was a New York resident, he would also have
additional state/local taxes as well. He wanted to fund his
donor advised fund with the paintings, however the charity’s
gift acceptance policies did not allow them to receive tangible
personal property/art or collectibles.
Charitable Solution: The charity referred the donor to the
Dechomai Foundation. We engaged Larry Zale, our art expert,
to help design the gift and to answer the donor’s art-specific
tax questions. The donor had a relationship with Sotheby’s so
we arranged to sell the two paintings at auction. Interestingly,
the New York sales tax did not apply to charities so we were
able to advertise that fact prior to the auction. Dechomai’s fee
was 2.4 percent and the net proceeds were granted to his
donor advised fund.
Related-Use Note: The Dechomai Foundation does not qualify
as a related-use charity so the donor’s income tax deduction
was limited to cost basis. He had planned to bequeath the
gifts to charity but realized that all the estate tax benefits would
still be enjoyed by making the contribution today, and at least
he would receive some additional current income tax benefit.
Also, he appreciated the fact that he could time the sale when
the market was right.
CHARITABLE GIFT ANNUITY RISK MANAGEMENT
1. Start-Up Program Policies
Facts: A Midwestern community foundation had delayed
starting a CGA program because of the perceived and real
risks. A number of local charities, however, recently asked
them to reconsider launching a program as their donors had
begun requesting gift annuities. The community foundation’s
CFO and Investment Committee had a number of concerns,
but the Development staff was eager to get a program
underway.
Charitable Solution: We drafted a comprehensive set of risk
management policies and procedures to mitigate the CFO and
Investment Committee concerns. The policies included
minimum gift sizes, a recommended asset allocation, a
monitoring plan and schedule, marketing recommendations
and specific risk management thresholds for risk retention,
reduction, transfer and avoidance. We presented the overall
plan via conference call to a combined audience of the
Development and Finance departments and answered any
remaining questions. The Investment Committee then
recommended Board approval for the program we
recommended.
2. Concentration Risk with Two CGAs Representing 40% of the Pool
Facts: A national charity had recently received one CGA of $1.1
million and one CGA of $3.7 million into a $7 million pool. The
CFO was concerned about the size of the gifts relative to the
pool. He wanted to see an in-depth financial analysis to
determine the best way to manage the concentrated risks.
Charitable Solution: We used our proprietary modeling
system to show probable and potential ending values under
various scenarios. Further, we solved for the optimal asset
allocation mix of equities, fixed income and reinsurance for
both annuities. For the smaller of the two, we recommended a
60 percent equity, 30 percent reinsurance and 10 percent fixed
income allocation and for the second larger gift, we
recommended a 40 percent equity and 60 percent reinsurance
allocation. Both allocations solved for the highest ending
balance with the lowest standard deviation (risk) using the
downside loss maximum the charity provided.
3. National Charity with Large Pool
Facts: A charity called us because they were worried that their
asset-to-liability ratio was becoming pretty thin. They had 120
gift annuities and $10 million in their pool, however they
calculated a liability of $9.6 million. They wanted a detailed
analysis of their entire pool, an audit of their current policies,
and specific recommendations for any current problematic
annuities as well as recommendations for policy changes
going forward.
Charitable Solution: We analyzed their entire pool and
provided a 20 page report with 15 graphs to clarify their
situation. As part of the liability analysis, we used our
proprietary CGA mortality table and found that they were under-
stating liabilities by almost 40 percent. The actual liability was
$10.3 million which meant the pool was “under-water” by
$300,000. We recommended six specific recommendations
for the troubled annuities, three recommendations for the
current pool and five recommendations for CGAs going
forward. We had three separate conference calls with the
charity’s investment manager, President, CFO and
development director.
4. Charity with Reinsurance Brokerage Request
Facts: A national charity had determined it was prudent to
reinsure a single large annuity. They wanted a broker that had
experience in the gift annuity market, could walk the financial
department through the accounting entries and FASB
implications, understood state reserve requirement
implications, donor relations and disclosure requirements,
annuity product design and placement.
Charitable Solution: We shopped the case with 12 different
national carriers and two non-commission carriers and
created a one-page Excel spreadsheet with the company,
premium, ratings and comments. We then created a graph for
donor and internal staff communication analyzing reinsurance
implications on the specific gift and what probable ending
balances were at various ages. We further worked with the
charity to determine the appropriate asset allocation of the
“side-fund”, the amount remaining after reinsurance. We had
a conference call with the accounting department prior to the
purchase to make sure they understood the transaction and
FASB implications. We then recommended the specific
product and custom designed the contract to comply with not
only the specific state of the donor, but also as a group
contract, to comply with other states as well to the extent any
additional annuities were ever added. Kim Lathbury Clontz, of
Immediate Annuity & Term Life Solutions, a licensed annuity
broker, prepared a report fully disclosing all fees/commissions
prior to the purchase, and then placed the product and
followed through until policy delivery.
Note: Charitable Solutions receives no commissions, fees or other
payments from reinsurance placement.
5. CGA Investment Manager Wanted to Customize Asset Allocation
Based on the Pool's Liabilities Characteristics
Facts: An investment manager wanted to have a deeper
analysis of one of their client’s pools. The pool was $73
million dollars and included 2,100 CGAs. They were most
interested in a report that assessed the pool across 10
dimensions of risk management with a special emphasis on
asset-liability matching recommendations.
Charitable Solution: We used our patent-pending process,
Life Income Risk Management Analytic Suite (LIRMAS), to
deliver a 50 page report on the pool. Within the report, we
made specific recommendations to optimizing asset-liability
matching and asset allocation based on the pool’s existing
health and statistical/longevity characteristics, the charity’s risk
tolerance, preponderance of restricted funds, maturity of the
pool and proprietary life expectancy calculations. We were
hired to perform a similar analysis on an annual basis.
