[ Previous Page]  [ Home Page ]

The following opinion is presented on-line for informational use only and does not replace the official version. (Mich Dept of Attorney General Web Site - www.ag.state.mi.us)



Opinion No. 6538

September 16, 1988


Issuance of annuities by university foundation


Regulation of annuities issued by university foundation

The gift annuity program proposed by the Michigan State University Foundation is not subject to regulation by the Commissioner of Insurance under the Insurance Code of 1956 unless the issuance of annuity contracts becomes its principal object and purpose.

Honorable David C. Hollister

State Representative

The Capitol

Lansing, Michigan

You have requested my opinion pertaining to a proposal by the Michigan State University Foundation (Foundation) to establish a private, charitable gift annuity program. Your question is:

'May a non-profit corporation qualified as an IRC 501(c)(3) entity exempt from taxation, the exclusive purpose of which is to further the educational, scientific, charitable, and related activities of a State University, lawfully issue private contracts of annuity without first obtaining a Certificate of Authority under MCL 500.600 et seq. or otherwise come within the regulatory purview of the Michigan Insurance Code.'

I am informed that the Michigan State University Foundation, established in 1973, is a nonprofit corporation which may receive gifts in kind or money. Its purpose is to provide funds for Michigan State University, which is its sole beneficiary. Donors may designate their gifts to the Foundation for specific university programs, or they may choose to support an unrestricted fund. The Foundation works jointly with the Office of Vice-President for Research and Graduate Studies and the Office of Research Development where grants, research and patent activities are concerned. The Foundation and the Office of University Development have organizational and administrative relationships which include shared programs and cooperative efforts. The Vice-President for University Development serves as President and Chief Executive Officer of the Foundation. You indicate that the Foundation is designated under the Internal Revenue Code as a 501(c)(3) entity, which entitles all donors to take a charitable deduction for gifts made to the Foundation.

The purposes for which the Foundation was organized are set forth in its 1973 articles of incorporation as follows:

'To provide support for the objects and purposes of the constitutional corporation known as the Board of Trustees of Michigan State University; to assist in an exclusively educational and charitable manner in the accomplishment of the educational purposes of such constitutional corporation; and to augment the facilities thereof in such manner as may be designated, directed, or desired by said Board of Trustees of Michigan State University. Included, by way of illustration but not limitation are the promotion, sponsorship and carrying out of the educational, scientific, charitable and related activities for the objects and purposes of Michigan State University; to take and hold by bequest, devise, grant, gift, purchase, lease, transfer, or other-wise any propety, real, personal or mixed, that may be appropriate to such accomplishment; to sell, exchange, convey, mortgage, lease, transfer and dispose of such property as the purposes and objects of the foundation may require; to invest and reinvest the principal and income in accordance with the laws of the State of Michigan covering authorized investments for trustees; to deal with and spend the principal and income of the foundation in such manner as will promote its objects; and in general to exercise such other powers which now are or may hereafter be conferred by law upon a foundation organized for the purposes herein set forth, namely: the promoting of the objects and purposes of the Board of Trustees of Michigan State University, or conducive to the attainment thereof.' (Emphasis added.)

The materials accompanying your opinion request indicate that the Foundation has been, and continues to be, active in a wide variety of programs intended to further its fund raising efforts for MSU. You indicate that one recently proposed activity involves the establishment of a private gift annuity program whereby a donor may elect to give either money or other property to the Foundation in exchange for issuance of a 'contract of annuity' by the Foundation. You have also provided the following additional information about the proposed program:

'1. That the donor would make a present transfer of property to the issuer.

'2. In return, the donor would receive periodic monthly, quarterly or semi-annual annuity payments for the balance of his or her life. Additionally, the donor may elect a joint and survivor annuity with benefits payable to the donor for life and to donor's survivor for life.

'3. The annuity benefit to be paid would be predicated upon a percentage of the present value of the asset transferred, determined from an annuity table based on the age of the donor (and the donor's survivor, if applicable) at the time of the transfer. The likely table would be that promulgated by the Committee on Gift Annuities.

'4. Upon the death of the donor (and donor's survivor, if applicable) the residuum of the annuity premium would vest in the issuer absolutely. The typical annuity table is calculated to produce a residuum of 50% of the original corpus to the issuer. Therefore, there is a life time return of interest and a portion of the corpus to the donor. However, given the high percentage of corpus returned to the issuer, ultimately based on an average life expectancy, it would seem that an annuitant would have to achieve an improbably advanced age in order to place the issuer at risk in terms of returning benefits in excess of the corpus.'

Most charitable organizations which offer charitable gift annuities follow the uniform gift annuity rates recommended by the Committee on Gift Annuities, a national rate setting body of long standing composed of members representing hundreds of gift annuity issuing agencies. With regularity, these members meet in conference and evaluate the charitable annuity field. The committee is served by professional actuaries and establishes a recommended rate of periodic payment on charitable gift annuities. The uniform gift annuity rates are com puted so as to produce, on the average, a residuum or gift to the organization of approximately 50% of the amount originally turned over under the contract of annuity. The rates are based on actuarial studies of mortality experience and consideration of the rate of income to be earned on invested reserve funds.

The rate of periodic payment on charitable gift annuities, however, is not as favorable as rates on annuities offered by commercial insurance companies, where there is no gift involved, although the rates are generally higher than a donor can obtain through ordinary investments such as bank accounts. The charity, in paying the attractive rates, realizes that a portion of the principal will be reverting back to the donor over his lifetime, but willingly undertakes this to assure the receipt of the gift during the life of the donor. This is far more advantageous from the charity's perspective than a revocable testimentary provision in a will, which permits the donor to revoke his gift during his or her lifetime. Matthies, The Charitable Gift Annuity, 44 Mich St B J, 34, 35 (1965). In short, the charity is inclined to pay a higher rate of periodic payment to the donor for the assurance that the gift is made. It is this immediate charitable gift of a portion of the transferred property that completely distinguishes a charitable gift annuity from a commercial annuity.

The impetus for annuities as tax planning devices has been expressed as follows:

'Another quite favorite device is to make a present gift to charity of a substantial sum--or, even better, of appreciated property in which latter event the donor secures the full benefit of present value without being subjected to capital gains consequences. Many universities, and some other institutions, now will make a certain repayment to the donor in the form of a reasonably generous annuity, which assures one of continued income in later years. The donor gets credit for the net value of the charitable gift, after the value of the annuity has been subtracted, pays on the annuity income upon a favorable tax rate, and has accomplished a charitable objective.' 1 Appleman, Insurance Law and Practice, Sec. 83, p 294 (1981).

The question of whether charitable gift annuities offered by colleges and universities were within the purview of the Insurance Code and hence subject to regulation by the Insurance Commission was addressed in 1 OAG, 1957, No 2706, p 129 (March 25, 1957). The opinion concluded that colleges and universities may enter into annuity contracts and not be subjected to the provisions of the Insurance Code of 1956 provided that these are transactions incidental to the main purpose of education, but no college may enter into annuities as a major portion of its activities. In so holding, the Attorney General, in quoting from 1 Appleman, Insurance Law and Practice, at 71, addressed the often stated differences between an insurance contract and an annuity contract as follows:

'Sec. 83. Ordinarily, it is recognized, even by laymen, that contracts of life insurance and of annuity are distinctly different. One involves payments of stated amounts, known as premiums, by th insured over a period of years in return for which the insurer creates an immediate estate in a fixed amount in the event of his death while in good standing. These benefits are to be paid to some designated person other than the insured, although the policy may provide that after the expiration of a certain period of time, the insured may elect to receive certain of these amounts personally. There is an immediate hazard of loss thrown upon the insurer, with the required performance by the insured of certain obligations at designated intervals of time.

'An annuity contract is almost diametrically opposed to this. The person designated as the recipient is the person paying the money. He pays in a fixed sum at one time, in return for which the company must then perform a series of obligations over a period of years, at designated times. The hazard of loss is no longer upon the company but upon the recipient who may die before any benefits are received. Instead of creating an immediate estate for the benefit of others, he has reduced his immediate estate in favor of future contingent income. The positions are almost exactly reversed. . . .' 1 OAG, 1957, No 2706, at 130-131.

The Attorney General further stated:

'The primary purpose of the Michigan Insurance Code is to regulate companies doing an insurance business. The purpose of the code is not to regulate isolated or limited annuity transactions.

'It would be a strange rule or regulation which would preclude educational institutions from accepting gifts and subject them to insurance laws if they received such gifts. It was not the intention of the Legislature in passing the insurance law to regulate educational institutions in relation to annuities. To hold that these gifts to educational institutions conditioned upon the payment of income throuhghout the donor's life constitute annuities, to be regulated under the insurance code, is not a natural interpretation of the insurance code and could result in subjecting educational institutions to regulations and unreasonable burdens where none were ever intended.

'. . . .

'To hold flatly that all annuities are covered by the insurance code would create a strained result inasmuch as annuities may be created by and between private individuals. There are exceptions and the Michigan Insurance Code must be construed in the light of its purpose. The legislature when it passed the insurance laws intended to regulate the insurance business within the state of Michigan.

'The insurance code cannot be stretched so as to include all conceivable types of annuities. The annuities that are presently covered by the insurance code are those as written by insurance companies. It is apparent that an educational institution might eventually progress so far in writing annuities that it could fall into the category of an insurance company. It is not apparent, however, that at the present time that educational institutions are so extensively engaged in the writing of annuities that they should be placed in the categoy of insurance companies.' (Emphasis in original.) 1 OAG, 1957, No 2706, at 130-131.

The section of the Insurance Code of 1956 defining life insurance referenced in 1 OAG, 1957, No 2706, supra, remains unchanged in Sec. 602 of the Insurance Code of1956, as amended, MCL 500.602; MSA 24.1602. Further, no intervening case law requires modification of this well reasoned opinion.

While insurance contracts are often distinguished from annuity contracts, it must be recognized that an annuity does, in fact, involve a degree of risk. The risk is that the donor may outlive his life expectancy, or the investment risk that the return may be less than anticipated when the amounts payable to the annuitant was determined. However, a small degree of risk assumption would not cause the issuer to be an insurance company under the law if the risk assumption is not the principal object and purpose of the issuer's business.

An incidental assumption of risk by a party in his business does not mandate regulation by the Insurance Bureau. The following quotation from a 1946 case is appropriate and enlightening in this regard. In Transportation Guarantee Co v Jellins, 29 C2d 242, 248; 174 P2d 625 (Cal, 1946), the Court stated:

'In construing the contracts in question it must be borne in mind that nearly every business venture entails some assumption of risk, . . .

'. . . .

'We are satisfied that a sound jurisprudence does not suggest the extension, by judicial construction, of the insurance laws to govern every contract involving an assumption of risk or indemnification of loss; that when the question arises each contract must be tested by its own terms as they are written, as they are understood by the parties, and as they are applied under the particular circumstances involved.

'. . . .

"That an incidental element of risk distribution or assumption may be present should not outweigh all other factors. If attention is focused only on that feature, the line between insurance or indemnity and other types or legal arrangement and economic function becomes faint, if not extinct. This is especially true when the contract is for the sale of goods or services on contingency. But obviously it was not the purpose of the insurance statutes to regulate all arrangements for assumption or distribution of risk. That view would cause them to engulf practically all contracts, particularly conditional sales and contingent service agreements. The fallacy is in looking only at the risk element, to the exclusion of all others present or their subordination to it. The question turns, not on whether risk is involved or assumed, but on whether that or something else to which it is related in the particular plan is its principal object and purpose.' In the California Physicians' Service case it is held that (28 Cal. 2d--, 172 P.2d 16.e 'Absence or presence of assumption of risk or peril is not the sole test to be applied in determining its status. The question, more broadly, is whether, looking at the plan of operation as a whole, 'service' rather than 'indemnity' is its principal object and purpose" (Emphasis added.) 174 P2d at 629.

Based upon the materials provided to me, it appears that the gift annuity program proposed by the Michigan State University Foundation is, as one of a wide variety of programs offered, incidental to the main purpose of promoting education at Michigan State University. It is not apparent to me, based upon the materials provided, that under the proposed program Michigan State University Foundation would be so extensively engaged in the writing of annuities that they should be placed in the category of an insurance company, subject to the provisions and requirements of the Michigan Insurance Code of 1956. However, as stated in 1 OAG, 1957, No 2706, supra, you must be cautioned that an educational institution might eventually progress so far in writing annuities that it could fall into the category of an insurance company.

It is my opinion, therefore, that the gift annuity program proposed by the Michigan State University Foundation is not subject to regulation by the Commissioner of Insurance under the Insurance Code of 1956 unless the issuance of annuity contracts becomes its principal object and purpose.

Frank J. Kelley

Attorney General

[ Previous Page]  [ Home Page ]