The ACGA’s suggested gift annuity rates, which became effective July 1, 2020, are the lowest they have been since the ACGA and its predecessor organization, the Committee on Gift Annuities, starting recommending them in 1927.
Suppose, for example, that in May of 2019 a donor, age 74 at the time, established a gift annuity. The ACGA rate would have been 6.1%. If she established another gift annuity after July 1 of 2020, her rate would be only 5.4%, even though she is a year older. What can you say to her, and to other potential donors, when rates are at the currently-low levels? Here are five suggestions:
- Show that, even with lower gift annuity rates, payments from the gift annuity will exceed the current interest on fixed-income investments. Do not compare the “interest” or “income” because payments from a gift annuity are partly a return of capital. Compare instead current cash flow. The differential between interest rates and gift annuity rates has not really changed very much.
- Mention the charitable deduction, of course, but probably talk more about the taxation of payments. Because the Sec. 7520 rate is currently very low, the tax-free component of payments from an annuity funded with cash will be larger than ever, so after-tax cash flow remains substantial even when gift annuity rates have been reduced. If the annuity is funded with appreciated property and the donor is the annuitant, a smaller portion of the payments is now taxed as ordinary income. The favorable taxation of payments will be more important to many donors than the charitable deduction, especially to the significant number who do not itemize deductions.
- Note that payments from the gift annuity are fixed for life. This will be particularly appealing to older donors who want the security of predictable payments, especially in these uncertain times. For individuals attracted to a charitable instrument that pays a fixed amount, the gift annuity may be the only alternative. That is because a charitable remainder annuity trust, which also pays a fixed sum, will not pass the IRS 5% probability test when the Sec 7520 rate is at its current level unless the beneficiaries are quite old.
- Call attention to a testamentary gift annuity to provide for heirs. With certain exceptions, such as a spousal beneficiary, the SECURE act requires funds in an IRA or qualified retirement plan to be distributed within 10 years. By establishing a gift annuity funded with remaining retirement funds, the payments can be extended over a beneficiary’s lifetime. The currently-low gift annuity rates need not be a deterrent because the applicable gift annuity rate will be the one in effect when the annuity is eventually funded, not now when the arrangement is made.
- Most important of all, stress what the gift will accomplish at the charity. This is the primary reason people establish gift annuities.
This not the time to hit the pause button on gift annuities. Yes, rates are at historic lows, but so are interest rates, and so are commercial annuity rates. People established gift annuities during stock market booms when they had lots of appreciated securities in their portfolios. They established them in times of recession when they were defensive. They established them when the IRS interest rate was over 10%, they are funding them now when that rate is a mere .4%. They have established them following a rate increase but also following a rate decrease. Indeed, gift annuities have been the most steadily popular of charitable life income plans. Thus, continue to promote them. They can be made appealing even when rates are low.