June 15, 2006 | Read Time: 2 minutes
An influential fund-raising group has recommended that charities increase the compounding interest rate used to calculate how donors and charities will benefit from an increasingly popular type of deferred gift.
The American Council on Gift Annuities says charities should increase the compounding interest rate for deferred gift annuities to a maximum of 5.25 percent annually, up from 5 percent, beginning July 1.
Through deferred annuities, donors make a gift to a charity in exchange for an immediate tax break; they also stipulate when in the future they wish to receive annual income payments through the annuity. At the donor’s death, any remaining funds in the annuity go to the charity.
The maximum compounding interest rates, which charities are not required to use (though most do), help fund raisers calculate both the amount of income donors will receive from deferred annuities and the amount nonprofit organizations will ultimately receive when the donors die.
The higher compounding interest rate, recommended in part because interest rates have been rising, may appeal to fund raisers and donors because it results in calculations that increase the donor’s annual income from deferred annuities.
Deferred annuities account for only 8.4 percent of all charitable gift annuities, according to the American Council on Gift Annuities. But they are growing in popularity among donors in their 40s and 50s who want to make a sizeable gift while they are in their peak earning years and at the same time ensure income during retirement, said Cam Kelly, director of gift planning at Smith College, who chairs the council’s interest-rate-setting committee.
As an example, Ms. Kelly pointed to a Smith alumna in her mid-40s who recently set up a $10,000 deferred annuity, with plans for annual payments when she reaches 62.
Under the current 5-percent maximum rate, Ms. Kelly says, the donor would receive $1,250 annually. If she had created the annuity after July 1, when the new maximum rates are used, she would get $1,290 each year.
More information on the interest-rate change for deferred annuities is available on the council’s Web site: http://www.acga-web.org.
