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What’s New with Charitable Gift Annuities

New recommended rates for Charitable Gift Annuities went into effect July 1, 2020.

In support of the gift planning community, the American Council on Gift Annuities (ACGA) periodically publishes a table of suggested maximum charitable gift annuity rates. Their latest recommended rates for Charitable Gift Annuities or “CGAs” became effective on July 1, 2020. The suggested maximum payout rates published by the ACGA are calculated under the following assumptions: 

  • The target residuum is 50% of the original gift amount and its present value must equal at least 20% of the original gift
  • The length of each annuity corresponds to life expectancy under the 2012 IAR Mortality Tables
  • The net annual return on the gift is currently 2.75% based on a gross annual return on the gift annuity portfolio of 3.75% and an annual expense of 1.0% 

The ACGA’s new single-life rates are 0.4% to 0.5% lower than the rates that went into effect on January 1, 2020, and the new two-life rates are 0.3% to 0.5% lower. A 75-year- old who establishes a charitable gift annuity after July 1, 2020 will receive an annual payout of 5.4%, which is down from 5.8% on January 1 of this year. Gift annuity payouts for annuitants 90 years of age and older will cap at 8.6%. A complete list of the new rates can be found on ACGA’s website. 

One factor shifting toward the lower CGA rate was the drop in the “7520 Rate.” This is the discount rate calculated in accordance with Section 7520 of the Internal Revenue Code (the “Code”). The 7520 Rate is used in compliance with the Code to determine the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest, whether or not a charity is involved. The Treasury updates the 7520 rate and publishes it with other Code mandated rates on a monthly basis. In January of this year the 7520 Rate was 2.2%, whereas in June it had dropped to 0.6%, where it remains for July. 

Why does a drop in the 7520 Rate push the CGA rates down? Code Section 514 is at least partially responsible. Under Section 514, if the present value of the annuitant’s interest in the CGA is greater than 90% of the purchase price, as calculated under the 7520 Rate, then the annuity obligation will be treated as a loan by the charity to the individual and any of the charity’s earnings on the principal of that loan will be subject to regular tax – a terrible result! Therefore, a charity must peg the annuity rate for its CGA to the 7520 Rate, and not just base its rates on its own assumed goals and predictions. 

Looking on the bright side of the downward rate trend, the lower annuity rate translates into a lower expected return on the contract, and thus less taxable income during the life term. In any case, the Charitable Gift Annuity has long been a popular planned giving vehicle and should remain an attractive option for donors who want to combine financial support to a nonprofit with the assurance of a fixed life income stream. To learn more about how a charitable gift annuity works, check out “How do Charitable Gift Annuities and Charitable Remainder Trusts Work?”

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This information is not intended to be and should not be treated as legal, investment, accounting or tax advice and is for informational purposes only. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. All information discussed herein is current only as of the date appearing in this material and is subject to change at any time without notice.