By Mark B. Weinberg

RECOMMENDED CGA RATES TO DROP

APPARANTLY IN RESPONSE TO ECONOMIC DOWNTURN

The American Council on Gift Annuities (ACGA) today altered its recommended rates for charitable gift annuities issued after June 30, 2008. This is a significant development for planned giving. While ACGA has not made any statement to this effect, it appears that the weakening economy and the inability to get combined returns sufficient to support the higher rates to be paid under the old tables (for at least the near term) prompts this action.

As background, ACGA periodically publishes a schedule of suggested charitable gift annuity rates. As the organization describes the process, although a charity is free to offer any schedule of rates it wishes – so long as its rates don't exceed the limits imposed by federal and state laws – most charities follow the ACGA tables. Thus, donors generally find that the rates offered by various charities are identical. This encourages donors to make philanthropic decisions based on the cause of the charities they consider supporting, rather than the rates offered. Charitable gift annuity rates are lower than those offered by insurance companies to purchasers of commercial annuities so that a significant portion of a contribution will be available for charitable purposes. Though lower than commercial rates, gift annuities are still very attractive to individuals who want simultaneously to support a favorite charity and provide payments to themselves or others. This is the first change in the tables since 2003.

I advise that charities consider refraining from sending out proposals to prospective donors until you have compared the old (http://www.acga-web.org/2007ratesjuly/ratesjuly07.html) and new (not yet released) tables and your CFO has advised as to what yield could reasonably be expected to be produced by gifts received under the new table compared to historic yields. Read the ACGA cite for detailed information about how their suggested tables are developed and used. The following suggests what might be expected for the same gift made on April 3, 2008 (the date of the newly announced tables) with otherwise identical provisions using first the old and then the new tables.

EXAMPLE: If a donor aged 72 makes a gift today, calling for quarterly payments at the 4.2% Section 7520 rate that would produce the largest deduction, the payout rate drops under the new tables from 6.7% to 6.3. Thus, a gift of $100,000 under the old tables would require a quarterly payment of $1675 for an annual total of $6700; only $1575 would be paid per quarter under the new tables, for an annual total of $6300. In short, the charity would pay $400 a year less for the 14.5 year life expectancy of the donor. The donor would get about $3680 more in an initial tax deduction that would significantly offset this loss. What using the new tables does is provide a cushion for the charity, by requiring it to pay less, and increasing the tax deduction because the donor gets less in return for the gift.