Charitable Gift Annuities provide a way for an individual to make a donation and still receive a stream of payments from the money.  But when a charity goes bust, so do the payments.

The WSJ is reporting today on the case of National Heritage, a charity in Falls Church, VA that was forced into bankruptcy because of a lawsuit.  Charitable Gift Annuitants who were expecting to receive regular payments based on their donation are now wondering what will happen.

"For the past several years, Matthew Allen has counted on receiving nearly $12,000 a month through a charitable gift annuity he set up with the National Heritage Foundation. That arrangement was upended in January, when the Falls Church, Va., charity filed for bankruptcy protection.

The filing meant that Mr. Allen and many other donors stopped receiving regular payments amounting to a collective $2 million annually.

"We were pretty devastated," says Mr. Allen, a 74-year-old retired manager of a cotton warehouse in Memphis, Texas. Among other sacrifices, Mr. Allen and his wife have stopped taking regular trips to visit their children in Dallas, curbed eating out and shelved plans to buy a new car.

Janet Ridgely, National Heritage's vice president, says she "feels personally horrible" about the charity's recent inability to pay annuity holders and that National Heritage "wants to do nothing but continue to help them. We didn't miss a payment until January."

Charitable Gift Annuities are considered legitimite retirement vehicles and are widely used by Universities and other charities.  Their principle benefit is that they allow individuals to make donations to their favorite causes and also retain a fixed payment through their lifetime.  Many could not donate if not for this fixed payout.  The payment is also usually larger than what they would receive if the money was deposited into a bank account.

But one of the key drawbacks of CGAs is that they are not insured.  And while they are regulated by state governments, a donor's payments often fall below general creditors in the case of bankruptcy. 

The economic crisis has put pressure on many charities who have seen their investments fall in value or who have suffered because of the duplicity of others (Madoff).  Before you invest in a Charitable Gift Annuity, be sure you understand the financial health of the charity and how they plan to keep your donation and your payments safe.

• Learn more about Charitable Gift Annuities