Charitable gift annuities (CGAs) can provide reliable, fixed payments for the beneficiary (often referred to as an annuitant). A CGA is typically established to make payments to a single annuitant for life or two annuitants over their joint lives. Payments are most often made by the charity that issued the charitable gift annuity in accordance with the payment timing and frequency spelled out in the annuity contract.
Periodically, however, an annuitant will have a change in address or a change in circumstances that interferes with the ability of the charity to deliver, and the ability of the annuitant to receive, future payments. This gives rise to the “missing annuitant” problem that occurs after a charity has mailed several annuity payments that have been returned as undeliverable. When encountered with this situation, the charity will attempt to locate the annuitant but many times those efforts will be unsuccessful.
A prior article provided background information about charitable gift annuities and explained some of the events that can result in a missing annuitant. This month's article concludes the discussion by explaining the steps a charity can take when faced with the missing annuitant problem. It also provides guidance for professional advisors to assist their clients – whether an annuitant, an agent acting under power-of-attorney for an annuitant or the executor of the estate of an annuitant. The right kind of advice can help these clients communicate with the charity, thereby ensuring annuity payments will continue where appropriate.
Charity and Missing Annuitants
During conversations between a charity and a prospective donor who is considering a gift to fund a charitable gift annuity, the charity staff - typically a gift planner or major gifts officer - will explain how a CGA works. As part of that discussion, the charity will explain the need for the donor to keep the charity informed in the event of a change of address or other change in circumstances affecting the beneficiaries. Some charities provide donors with a “change of address form” with instructions asking the donor to complete the form and mail it back to the charity when the donor has a change of address or circumstances. Typically, this form also includes a “next of kin” designation, allowing the charity to contact a beneficiary's family member in the event the beneficiary cannot be located. Some charities even mail a new contact form to each annuitant with the first annuity payment each year along with a request that the annuitant return the form if there have been any changes in address over the past year. Despite this up-front conversation, and annual reminders, a donor or beneficiary may forget to keep the charity informed when they have moved.
When encountered with the missing annuitant problem, many charities will take several steps. Before discussing these steps, however, it is important to note these are not necessarily required by state law. In fact, states typically offer charities little guidance with respect to what to do in the case of a missing annuitant. The steps outlined below are general guidelines that have been developed based on principles from other areas of law, such as laws related to fiduciary duty and what executors and trustees are required to do in the case of a missing heir under state probate law. Charities that are considering adopting policies to address the missing annuitant scenario should ask their general counsel to review state law related to charitable gift annuities, insurance and probate and adjust their policy for addressing this situation accordingly.
Continue to Make Payments
As discussed in last month's article, a charity has a legal obligation to continue to make CGA payments to the life income beneficiaries, typically for one or two lives, in accordance with the terms of the annuity contract. The charity's payment obligations end once all of the beneficiaries have passed away.
The fact that one or more annuity checks has been returned to the charity as undeliverable, or the charity notices that one or more checks have not been cashed by a beneficiary, does not absolve the charity of its payment obligation. In such cases, the charity is faced with a situation where contractual performance may no longer be possible. The charity wants to keep its promise to make the annuity payments but it is no longer able to ensure that the beneficiary receives the payments. In such cases, the charity should continue to send annuity checks for a reasonable time.
What constitutes a reasonable time could differ from state to state - there is no clear guidance on this point under state law. After a reasonable time has passed, however, some charities will stop sending payments altogether. Other charities will adopt a slightly more conservative approach and follow the remaining steps outlined below, steps which include establishing a segregated escrow account into which payments for missing annuitants are deposited.
Formally Attempt to Determine Annuitant's Whereabouts
Before discontinuing payments or depositing any payments into an escrow account, a charity should try to determine the whereabouts of the missing annuitant. The charity should attempt to contact known relatives of the annuitant and, if applicable, the professional advisor who worked with the annuitant when the CGA was established. In addition, the charity should send a letter by certified mail, return receipt requested to the last known address of the annuitant asking the annuitant to contact the charity.
Try to Determine if an Annuitant Has Passed Away
Once all of the annuitants have passed away, the issuing charity can stop sending future annuity payments. In addition, there is another reason, having to deal with state compliance, why a charity will want to determine if an annuitant has passed away. Some states require that a charity that issues annuities maintain a segregated reserve account to ensure that the charity can meet its annuity payment obligations. In addition, these states require that the charity file an annual report that calculates and reports the required reserves. Once an annuitant has passed away, the charity can stop reporting information related to that annuity and is allowed to remove the required reserves attributable to that annuity from the reserve account.
What steps can a charity take to verify whether an annuitant has passed away? There are a variety of methods, including:
- Social Security Death Index. The Social Security Administration (SSA) maintains a death index of persons who have passed away. The death index records the decedent's name and Social Security number. The death index can provide a charity with confirmation of an annuitant's death. Use of SSA's death index is not the most effective tool in most cases, however, due to the fact that SSA only releases the index publicly on a 10-year delay (i.e., the index for persons who passed away in 2016 will not be released until 2026).
- Third Party Services. There are several services that charities, executors of estates and other parties can use to confirm a death. One such service - TLOxp - is provided by Transunion. Transunion is a credit reporting agency that calculates consumer credit scores and provides credit reports to banks and other lenders. In order to prevent potential fraud following a death, the executor of an estate typically acts quickly to report the death to the credit reporting agencies. Failing to do so may complicate the executor's job. For this reason, Transunion has a death database that is typically very current.
- Obituaries and Death Notices. Many times, a charity can confirm the death of an annuitant by searching the Internet on websites such as Tributes.com or Facebook or by conducting an Internet search using the annuitant's name, hometown and the word “obituary.” This strategy may confirm, with relative certainty, that an annuitant has passed away.
- Probate Court. When someone passes away and they have a valid will, the decedent's will is probated by the court and, if someone died without a will, a relative or close friend will seek approval from the probate court for a final disposition of the decedent's assets. Many probate courts, for a nominal fee, have a searchable database for all probate cases that have been filed with the court. This database may help a charity confirm that an individual annuitant has passed away.
If a charity has taken any of these steps and can reasonably conclude the annuitant has passed away, then it is probably safe for the charity to discontinue sending future annuity payments. Before stopping future payments, the charity should prepare a memo detailing exactly what steps were taken and what evidence the charity used to arrive at the conclusion that the annuitant had passed away. That memo should be included in a file along with the annuity agreement and any other information the charity has on the annuitant, such as the envelopes from any annuity payments that were returned to the charity and any certified mail returned to the charity.
Establish an Escrow Account
What should a charity do if it cannot reasonably determine that an annuitant has died and cannot locate an annuitant after a series of annuity payment checks have been returned as undeliverable? In this case, charity staff should consult with their general counsel. It would be reasonable for counsel to look to the insurance code and the probate code in the charity's home state for guidance.
Most state probate codes spell out a procedure for what the executor of an estate must do in the event that there is a “missing heir” – an heir who stands to gain an inheritance from someone who has passed away but cannot be located (state insurance law may also address the “missing beneficiary” scenario for life insurance policies). Typically, state probate codes require that the executor hold the inheritance in trust for three to five years and if, after that time, the heir cannot be located, the probate code will provide instructions on the next steps that should be followed.
Using this as guidance, when encountered with the missing annuitant situation, the charity could decide to hold future payments “in trust” for the annuitant. The charity can deposit an amount equal to each of the undeliverable checks belonging to an annuitant into an escrow account maintained solely to hold payments for missing annuitants. Future payments attributable to that annuitant should be deposited into the escrow account as well. If the charity uses this method, the charity should keep a detailed ledger to record all deposits into this account, especially if the account holds payment for more than one missing annuitant (it should be acceptable to co-mingle payments for more than one annuitant in a single account as long as the charity maintains a detailed ledger that records the date and amount of each deposit as well as the name of the annuitant to whom that payment is attributable).
These are prudent steps for a charity to take. Establishing an escrow account would demonstrate that the charity continues to regard these payments as belonging to the annuitant even if the charity cannot locate the annuitant. If, after the holding period established in the charity's policy, an annuitant has not stepped forward to claim the missing payments, then under principles of trust law, it would be appropriate for a charity to transfer all of the payments attributable to the missing annuitant from the escrow account to an account the charity uses for its own purposes. (Keep in mind, if an annuitant steps forward after five years to claim their missing payments, the charity still has to make good on the payment obligation.)
Example 1 – Fifteen years ago, when Althea and her late husband Derrick were both 75, they funded a $1,000,000 charitable gift annuity with their favorite charity. The annuity agreement provided that the charity would make quarterly payments of $15,750 starting on March 1, 2001. Roger, the gift planner at the charity, knew that Derrick had passed away. Beginning in January 2015, Althea's quarterly annuity payment checks were returned to the charity as undeliverable. Roger attempted to locate Althea but was unsuccessful. Roger consulted with the charity's general counsel. They looked at state law and established an escrow account into which they would deposit and hold in trust an amount equal to each of Althea's returned checks as well as any future payments due Althea for another three and a half years. Under the policy they adopted, if Althea or someone acting on her behalf does not step forward to claim these payments, charity will transfer these payments for the use of the charity.
Advice for Professional Advisors
Professional advisors may have a number of clients who require assistance with respect to a CGA. The advice given, and reason for the advice, will differ depending on the role of the client. For example, if a client is an annuitant or is thinking about making a gift to fund a charitable gift annuity, the client will need advice that is different from the advice given to a client who is the executor of an estate for a deceased annuitant. What follows is some practical advice that advisors can use when talking with their clients.
Client is an Annuitant
If a client is a CGA annuitant, or is likely to become one, a professional advisor can take steps to assist the client to ensure the client does not become a missing annuitant. Professional advisors who regularly work with their clients, such as a CPA who files a client's annual income tax return, are in an excellent position to offer assistance. Advisors should include notes in the client's file if the client is an annuitant. A CPA, for example, should include notes in the file about a source of annuity income if the CPA reported 1099-R annuity payment information on the client/annuitant's tax return. If the client/annuitant moves, the CPA should consult the file and offer to contact the charity directly as a service to the client. Alternatively, the CPA could recommend that the client contact charity directly to provide updated contact information. This will also ensure that the client continues to receive future payments and vital tax reporting documents at the new address.
Attorneys can provide a similar service to their clients. For example, estate planning attorneys can maintain instructions in the client file on what they will do in the event of a client's change of address. An attorney who is preparing a durable power-of-attorney for a client should advise the client to keep an up-to-date summary of financial accounts and income streams. The power-of-attorney document should make reference to the letter from the principal (the client, or person who executes the power-of-attorney) to their agent. This letter should list sources of income, such as Social Security, paychecks, rental income, payments from retirement accounts (pensions, 401(k) accounts and IRAs) as well as annuity payments from charitable gift annuities and income payments from charitable remainder trusts. The letter should include information about the anticipated timing or frequency of any payments (i.e., monthly, quarterly, etc.), how payments are made (i.e., direct deposit, by check, third party handling such as a management company, etc.), where they are typically deposited (i.e., identifying the appropriate financial institution and account number) and contact information for each person or institution that will be remitting payment to the principal. If a client's agent has this letter, and a payment does not arrive as scheduled, the agent will have sufficient information to identify the missing payment, to contact the paying party and then recoup the missing payment on behalf of the principal.
Client is an Agent Acting Under Power-of-Attorney for an Annuitant
If an advisor's client is an agent, or attorney-in-fact acting under a power-of-attorney, this agent will want to ensure that the agent is able to receive and account for all income and payments due the principal. Before a client accepts the role of attorney-in-fact, the client's professional advisor may want to counsel the client to request the kind of letter described above from the principal.
If, as with Example 6 from Part I of this series, an annuitant is incapacitated at the time of appointment, the agent may seek access to the principal's deposit accounts. The agent should look at past account statements for at least two years to determine whether there are any patterns with respect to payments or income. Additionally, the agent should attempt to review the principal's prior tax returns to determine sources of income. If the agent identifies deposit patterns or prior payments, the agent should reach out to the paying party to describe the situation (such as incapacitation) and ask questions about the sources and reasons for past payments to determine whether there will be future payments from this party. The agent may also want to ask for documentation concerning the sources of any payments, such as asking for a copy of the CGA agreement.
By looking through past records and contacting third parties where appropriate, the agent will be in a position to ensure that the agent continues to receive all appropriate sources of income due the principal and then to use those monies to provide for and support the principal.
Attorney or Client is an Executor of the Estate of a Deceased Annuitant
If the advisor, such as an attorney, is the executor of an estate or is representing the executor of an estate, there are several reasons for the executor to contact a charity that had remitted prior payments to a deceased annuitant. These include:
- Proper Administration of the Estate. Under a CGA contract, payments made after the death of the annuitant are typically not the property of the deceased or the deceased's estate. CGA contracts typically provide that the annuity payment made immediately prior to the death of the annuitant is the last payment due the annuitant. Accordingly, if the executor of an estate continues to receive CGA payments, the executor should not treat those payments as property of the decedent's estate and the executor should not spend or otherwise distribute those payments to the heirs. Rather, those payments should, by law, be returned to the charity. If they are not returned, the charity may have to initiate a legal action to recoup those monies and it is possible that the executor could be liable for conversion of any over-payment related to a CGA.
- Provide for Heirs. Executors of an estate are typically very conscious of the intentions of the decedent in terms of the disposition of the deceased's assets, especially when that intent is clearly reflected in a will or trust. A charitable gift annuity agreement can be equally strong in conveying someone's intent. Consider Example 7 from last month's article that involved Miriam and Maude. Miriam established an annuity to make payments to herself and, if Miriam was survived by her sister Maude, annuity payments would be made to Maude for the rest of Maude's life. This annuity clearly reflected Miriam's intent to use a CGA to provide for her sister in much the same way that a bequest in a will or trust would. If an executor contacts the charity to advise the charity that the current annuitant has died, the charity can then make arrangements to make future payments to the successor (or next-in-line) annuitant. If this is what the donor/decedent who funded the annuity intended, it is right for the executor of the estate to ensure the decedent's wishes with respect to the annuity are carried out as intended, just as the executor is doing with respect to the decedent's estate plan.
- Filing the Final Tax Return. Finally, the executor will want to notify the charity that the annuitant has passed away because it may assist the executor in filing the decedent's final income tax return. By notifying a charity that the annuitant has passed away and returning any annuity payments issued after the death of the annuitant, the executor will be able to assist the charity in preparing a final 1099-R related to the annuity payments for inclusion on the decedent's final income tax return. Annuity payments returned to the charity should not be included as amounts distributed or taxable to the annuitant. Additionally, the executor should ask the charity if a donor/decedent had any unrecovered basis in the annuity contract. Any unrecovered basis in the annuity contract may be deducted on the final income tax return of the decedent. Accordingly, when the executor contacts the charity to advise that an annuitant has passed away there are two potential tax benefits to the deceased's estate.
A split interest gift, like a charitable gift annuity, can provide a donor with several nice tax benefits as well as regular, fixed payments for life for one or more annuitants. Accordingly, a CGA can be a good tool to help donors achieve their philanthropic and planning goals. Periodically, however, a change in address or other circumstances may make it difficult for the charity to continue to make required payments to a beneficiary. When confronted with this situation, charities will go to great lengths to try to locate a missing annuitant. By employing some of the strategies discussed in this article, professional advisors will be able to counsel their clients who are annuitants, agents acting under power-of-attorney for an annuitant or executors dealing with the estate of an annuitant.