Rates Effective July 1, 2008 to January 31, 2009

Present Value Calculation Table for Charitable Gift Annuities

Background

In 2008, the ACGA Rate Recommendation Committee requested a report that would clarify the present value that charities should expect from issuing charitable gift annuities. This was prompted by a continued emphasis on both calculations and process transparency as well as a general misunderstanding of the projected residuum assumptions (please see Rate Recommendation Report for a comprehensive description of the assumptions). Specifically, we project a future value average residuum of 50% of the original gift. So, we assume that a $10,000 CGA on a donor, will provide the charity with an average residuum of $5,000 at the annuitant’s death. Many charities then ask, “What is $5,000 that the charity will eventually receive worth today?” This brings us to a discussion of present value.

Definition of Present Value

Present value is simply the value in today’s dollars for an amount that will be received in the future. The key concept is that $1 today is worth more than $1 received in the future. A simple example is a one year calculation based on an expected return. If you currently have $100 and can earn 5% in one year, at the end of year one you will have a projected $105 in future value. If someone said, “I will give you $105 in one year, how much will you give me today?,” then you simply discount the future by the assumed rate of return of 5% and you would end up with a present value of $100. As you can see by this example, a person can calculate a future value based on assumptions ($105) and a current present value ($100), and then can calculate a present value based on assumptions ($100) and a future value ($105). This illustrates the time value of money and can be easily calculated using a set of formulas/factors or with a financial calculator.

Back to our CGA example, we assume that the charity will receive $5,000 in the future, but the charity is asking how much is that future remainder worth today? For an example, for a $10,000 gift made by a 60 year old, by using the assumed ACGA net rate of return as the discount rate - 4.75% - and a financial calculator, we derive a present value of $1,378.26 for the eventual $5,000 to be received. So the present value to the charity is 13.78% of the original gift annuity contribution. What follows is a table that provides the calculations at various ages.

Present Value Calculation Table

We hope the following table is useful for both internal and external constituencies to better understand the present value of charitable gift annuities. Based on the assumptions used to calculate the present gift annuity rates (4.75% discount rate), sample present values of residua at issue date for single life cases per $10,000 paid for the annuities are as follows:

Age

Present Value at
Issue Date of
$5,000 Residuum
Present Value as a Percent of
$10,000 Original Gift
60
$1,378.26
13.78%
65
1,689.01
16.89%
70
2,246.63
22.47%
75
2,457.74
24.57%
80
2,893.91
28.94%
85
3,327.19
33.27%
90
3,719.24
37.19%

Because our calculations were based on a $10,000 CGA, users can simply multiply these factors for any larger gift proportionally. For example, a $50,000 CGA is five times larger than $10,000. So for a 70 year-old, you could simply multiply $1,870.12 x 5 = $9,350.60 as the present value. Or even easier, it is the same 18.7012% of $50,000 or $9,350.60. These factors, therefore, can be extrapolated for any CGA.

No attempt was made to address the fact that in real life the present values would be different depending on the sex of the annuitant (male higher and female lower). Further, these present value calculations followed the exact ACGA Rate Committee assumptions so any realized differences in expenses, investment returns or timing, payment frequency, longevity or any other set of assumptions (e.g., the IRS discount rate, the rate of inflation, the NCPG valuation guidelines, etc.) would produce different results.

Implications

The Rate Recommendation Committee hopes these calculations can be helpful in the decision-making process as it relates to:

  • Minimum ages
  • Minimum amounts
  • Outsourcing decisions
  • Administrative efficiencies

Drafted by ACGA Rate Recommendation Committee members Bryan Clontz, CFP®, President of Charitable Solutions, LLC, Michael Mudry, ACGA’s Actuary and Susan Gutchess, Director of Gift Planning Administration at The Nature Conservancy.