Brave New World of Planned Giving: Assessing the Damage and Rethinking Planned Giving Policies

1. Brave New World of Planned Giving: Assessing the Damage and Rethinking Planned Giving Policies Jonathan H. Gudema, Esq. Managing Director, Changing Our World, Inc. Alan Berkowitz, Planned Giving Director Juvenile Diabetes Research Foundation New York | London | Los Angeles | Washington DC | Boston

2. Do our gift annuity programs resemble ponzi schemes?

3. CGA declining principal exampleDonor age 65, current ACGA rate 5.3%, $10,000 CGA 4% flat return, 30% drop in yr 10 4% flat return LE LE LE = Life expectancy

4. Charitable gift annuities (CGAs) • Risk #1 – CGAs are general obligations of the charity • CGA concept predicated on: • Consistent positive investment returns • Life expectancy tables • Significant numbers of annuitants will likely confirm tables • CGA donors who die before life expectancy will cover for those who live past life expectancy • There is real risk with any CGA – the larger the CGA, the larger risk • Risk #2 – Tangling with departments of insurance • Obligations in NY are to file for license, maintain reserves (even add to reserves on occasion) and file annual reports • New York isn’t the only state with regulations – must meet requirements of state where donor resides

5. Charitable remainder trusts (CRTs) • Risk #1 – Trusts are legal documents • Trustees are fiduciaries – are held to a high standard • Conflicts of interest can haunt a charity • Who is paying an attorney to draft a CRT? • Has the donor’s attorney reviewed and signed off on the trust document? • Does the donor fully understand the arrangement? • A CRT exhausting its assets is probably just the beginning of an organization’s problem, not the end • Risk #2 – Entanglement in complex arrangements • Not every piece of real estate in Montana is worth taking into a CRT • A charity may expend time, money and effort for little or no return • Know when to say no

6. Gift acceptance policies • Minimum/maximum ages • Minimum/maximum amounts • Remainders from gift annuities • Including other organizations for remainder portion • Required forms • Written policies • When to consider reinsurance

7. Ages when single life CGAs exhaust Age at Exhaustion Investment Assumptions Age at Inception All payout rates are from the 2/1/09 ACGA tables

8. Ages when joint life CGAs exhaust Age of Survivor at Exhaustion Investment Assumptions Ages at Inception All payout rates are from the 2/1/09 ACGA tables

9. Does using deferred CGAs lesson risk of exhaustion? Age at Exhaustion Investment Assumptions Age at Inception All payout rates are from the 2/1/09 ACGA tables

10. Gift acceptance policies • Minimum/maximum ages • Minimum/maximum amounts • Remainders from gift annuities • Including other organizations for remainder portion • Required forms • Written policies • When to consider reinsurance

11. Example of failing annuity Three 2-life CGAs (donors now age 84 and 93) created in 2002, 2003 and 2005 Annuity: $23,000, Total Contributed: $300,000, Remaining Principal: $170,000 194% 141%

12. Gift acceptance policies • Minimum/maximum ages • Minimum/maximum amounts • Remainders from gift annuities • Including other organizations for remainder portion • Required forms • Written policies • When to consider reinsurance

14. Gift acceptance policies • Minimum/maximum ages • Minimum/maximum amounts • Remainders from gift annuities • Including other organizations for remainder portion • Required forms • Written policies • When to consider reinsurance

16. Gift acceptance policies • Minimum/maximum ages • Minimum/maximum amounts • Remainders from gift annuities • Including other organizations for remainder portion • Required forms • Written policies • When to consider reinsurance

17. Rethinking gift annuities • The concept of a gift annuity – 50% at end of life expectancy • Reinsurance as an option? • New York State – reinsurance treaty issue • Required reserves for self-insuring • At what point does reinsurance outperform self-insurance?

18. At what point does reinsurance outperform self-insuring? Age When Reinsurance Outperforms Self-Insurance Investment Assumptions Life Expectancy Age at Inception All payout rates are from the 2/1/09 ACGA tables

19. Planned Giving Group Of Greater New York Charitable Gift Annuity Programs: Reinsurance Overview & Case Study May 20, 2009

20. Reinsurance Overview

21. Discussion Topics • The Basics • What is reinsurance? • Reinsurance vs. self-insurance • What risks does reinsurance address? • Operations • Reinsurance in action • Reinsurance by the numbers • New York reinsurance regulations • Other things to note

22. What Is Reinsurance? An agreement by which a charity transfers all or part of its risk under a contract to an insurer. In essence, the charity uses the assets from the donated gift(s) to purchase a “commercial annuity” as an investment to pay the donor. The difference between the original gift and the reinsured annuity is known as the “residuum”. • Leverage insurers’ experience and scale • Financially strong insurer important • Donor transparency consideration • Charity still responsible for liability Items toNote:

23. Investing Your Gift Reinsurance Pros • Immediate access to residuum • Minimize all risks • Reserve relief Cons Two Approaches • Bear insurer solvency risk • Relinquish control • Relinquish potential for higher returns Charitable Gift Annuities Self-insurance Charity uses ACGA rates to provideannuity to donor Pros • Potential for higher returns • Pool investible assets • Greater equity usage Cons • Bears significant annuity risk • Delayed access to residuum • Conservative state reserve requirements

24. Minimize Program Risks • Asset / liability mismatches, earnings volatility, inadequate returns I N V E S T M E N T • Lack of scale can expose charity tosignificant volatility L O N G E V I T Y • Annuities are not primary to charity’s objective A D M I N I S T R A T I V E Reinsurance can mitigate these risks

25. Reinsurance In Action Donor Male, Age 70 Life Expectancy: 16.6 yrs $30,050 Annuity Premium Insurance Company Charity Retains $19,950 $50,000 Gift Promise of annuity payments using ACGA rates* Insurer guarantees to pay $2,850/yr. or $237.50/mo. to charity If directed by charity, insurer can pay donors directly • Insurer Assumes: • Investment risk • Longevity risk • Administrative risk * Standard annuity rates developed and provided by the American Council on Gift Annuities (ACGA) as of 2/1/09 for use by charities that offer gift annuities. The rates are designed so that at the annuitant’s expected mortality date, a significant amount of money (a residuum) will be left over as a gift to the charity. * Annuity pricing as of March 2009.

26. Reinsurance by the Numbers Self Insured Scenario • Higher if: • Donor dies sooner • Charity earns more Donor Male, Age 70 Life Expectancy: 16.6 yrs $50,000 Gift $25,000 Residuum • Lower if: • Donor lives longer • Charity earns less Reinsurance Scenario Reinvest Residuumwith balance at life expectancy

27. New York Reinsurance Regulations Three Keys: ReinsuranceTreaty Valid reinsurance agreement only -Not typical annuity contract Must reinsure with NY authorized life company Required Reserves Without Reinsurance WITH Reinsurance Reserve reduction for reinsured CGAs

28. Last Things to Note • Structure Flexibility • Selective reinsurance (gift size, gender, age) • Existing versus future on-going purchases • Administration • Bulk payment arrangements • Tax Reporting • Participant disclosure • Not legally required, but recommended

29. Summary • Leverages an insurer’s asset/liability management expertise • Allows charity to take advantage of insurer’s mortality pooling • Transfers longevity, investment and administrative risk • Improves charity’s cash flow • Charity can focus more resources on its key objectives

30. Charity Perspective

31. Juvenile Diabetes Research Foundation • Founded in 1970 JDRF is a leading non-profit funder world of diabetes research   • Mission to find a cure for diabetes and its complications • Chapter-based organization - nationwide • We will put ourselves out of business • Do not have an endowment • Investment assets of approximately $110 million • Matched against current and future liabilities

32. Charitable gift annuity program • Established in 1996 • Have issued 152 annuities • 25 annuities have “matured” • Transferred $407K out of pool - - 66% of initial gift value • 127 annuities in force • Market through newsletters, website, magazine, board presentations • Annuity program key outreach tool – additional gifts and bequests

33. Gift annuity investments • Three pools • Outside administrator/investment committee • Current mix: 31% fixed income, 7% real estate, 62% equities • Added funds to meet NYC reserve requirement • Current market value of pool – approximately $1.9 million

34. Planned giving officer concerns • Significant deterioration in value of pools in a short period of time • CGA program as a contributor - - not a detractor • Worst case scenarios • Possible shutdown of program (premature)

35. Current status • Slowly navigating • Approached regarding reinsurance • Complex issues • Balance: compelled to act/avoid knee jerk reaction • Not marketing aggressively • Investment committee

36. Case Study

37. JDRF Annuitant Data • Number of donors = 90 • Wide distribution of ages • More than 50% of premium for donors now over age 80 • Low concentration of gifts with few donors • Highest donor is 10% of pool • Next highest is 5%

38. Reinsurance: After The Fact vs. At Inception • Why is reinsurance not generating a residuum? • Asset levels are depressed • Interest rates are relatively low • Mortality experience is better than predicted • Better than average lifestyle of donors

39. Mortality / Longevity Issues to Consider Reserve Development for a $1,000 Gift* • Older ages more volatile funding / greater risk • Older ages higher yields required on investments • Older ages need for increased fixed income • Mortality improvement is outpacing predictions 130% Higher Assumes expected mortality Assumes no mortality Contradictory * Assumptions: Current ACGA Rates; donor is an 80 year old male

40. Summary What are the reinsurance possibilities? • In deciding whether to reinsure, it is important to understand program risks • Investment, mortality, concentration risks • Once you understand these risks, you have two choices • Transfer the risk – eliminate it • Manage it yourself • You don’t want to have to take money from your endowment fund to address deficiencies in your CGA pool

41. Important Disclosure • “The Hartford” is The Hartford Financial Services Group, Inc. and its subsidiaries, including the issuing company, Hartford Life Insurance Company. • The benefits described in this presentation are provided through a reinsurance agreement in the states of AR, CA, FL, MD, NJ, NY, OR, WA and WI.In other states, the benefits are provided through a group, fixed annuity contract issued by Hartford Life Insurance Company under the nationwide form number HL-19202 for block purchases and HL-17393 or HL-15290 for ongoing purchases for individual annuitants. Not available in all states. • References to "Guarantees" within the description of this product are based on the claims-paying ability of Hartford Life Insurance Company. • This information is written in connection with the promotion or marketing of the matter(s) addressed in this material. The information cannot be used or relied upon for the purpose of avoiding IRS penalties. These materials are not intended to provide tax, accounting or legal advice. As with all matters of a tax or legal nature, you should consult your own tax or legal counsel for advice.