Nonprofit Groups Urged to Trim Rates Paid on Gift Annuities
By Brad Wolverton
Contributor
November 14, 2002 | Read Time: 2 minutes
Charities should trim the rates they pay donors of gift annuities, according to a national planned-giving organization.
The American
Council on Gift Annuities has recommended that, starting in January, charities reduce rates for donors of all ages by an average of 0.5 percentage points.
Gift annuities allow donors to contribute cash or other assets to a charity in exchange for fixed annual payments. The percentage of a gift that a charity pays to a donor varies with the donor’s age. Younger donors receive smaller payments because they are expected to live longer than older ones.
Most charities use the council’s recommended rates, although they are not required to do so. The assumption behind the council’s calculations is that charities will receive half the value of the gift. In the past, nonprofit organizations have earned as much as 90 percent.
The council normally announces any rate changes at its spring meeting, according to Frank Minton, chairman of the committee that sets the council’s rates. But he says the organization decided to act sooner for several reasons:
- Continued low interest rates, the drop in the stock market, and a precipitous decline in the yield for 10-year Treasury notes caused the council to recognize that charities are probably not making as much money on the investment of gift-annuity assets as they have in the recent past. The new rates are based on the assumption charities will earn an average return of 6.25 percent on their investments of gift-annuity reserves. Until recently the council assumed charities could expect 6.75-percent returns.
- People are living longer, according to the council’s recent mortality data, and charities need to adjust gift-annuity rates to reflect that, Mr. Minton says. If charitable groups don’t take longer life expectancies into account when setting rates, he says, they ultimately will pay out more on their annuities than they might have expected.
- The IRS discount rate, also known as the charitable mid-term federal rate, recently reached its lowest level ever, 3.6 percent. The lower the discount rate, the smaller the deduction a donor can receive from a gift annuity, Mr. Minton says. The council’s new gift-annuity rates ensure that donors will receive greater than a 10-percent tax deduction at all ages, provided that the IRS discount rate is 4 percent or higher. If the discount rate remains less than 4 percent, Mr. Minton says, some donors younger than age 30 could find it difficult to receive a deduction greater than 10 percent.
| NEW GIFT-ANNUITY RATES FOR ONE INDIVIDUAL | ||||||||
| Age | Old rate | New rate | Age | Old rate | New rate | Age | Old rate | New rate |
| 1 or under | 4.8% | 3.7% | 41 | 5.5% | 4.8% | 66 | 6.8% | 6.3% |
| 2-5 | 4.8% | 3.8% | 42 | 5.5% | 4.8% | 67 | 6.9% | 6.4% |
| 6-12 | 4.8% | 3.9% | 43 | 5.5% | 4.9% | 68 | 7.0% | 6.5% |
| 13-19 | 4.8% | 4.0% | 44 | 5.5% | 5.0% | 69 | 7.1% | 6.6% |
| 20 | 4.8% | 4.0% | 45 | 5.6% | 5.0% | 70 | 7.2% | 6.7% |
| 21 | 4.8% | 4.1% | 46 | 5.6% | 5.1% | 71 | 7.3% | 6.8% |
| 22 | 4.8% | 4.1% | 47 | 5.6% | 5.2% | 72 | 7.4% | 6.9% |
| 23 | 4.9% | 4.1% | 48 | 5.7% | 5.3% | 73 | 7.6% | 7.0% |
| 24 | 4.9% | 4.1% | 49 | 5.7% | 5.4% | 74 | 7.7% | 7.2% |
| 25 | 4.9% | 4.1% | 50 | 5.7% | 5.5% | 75 | 7.9% | 7.3% |
| 26 | 4.9% | 4.2% | 51 | 5.8% | 5.5% | 76 | 8.0% | 7.5% |
| 27 | 5.0% | 4.2% | 52 | 5.8% | 5.6% | 77 | 8.2% | 7.6% |
| 28 | 5.0% | 4.2% | 53 | 5.9% | 5.7% | 78 | 8.4% | 7.8% |
| 29 | 5.0% | 4.3% | 54 | 5.9% | 5.7% | 79 | 8.6% | 8.0% |
| 30 | 5.0% | 4.3% | 55 | 6.0% | 5.8% | 80 | 8.9% | 8.3% |
| 31 | 5.1% | 4.3% | 56 | 6.1% | 5.8% | 81 | 9.1% | 8.5% |
| 32 | 5.1% | 4.4% | 57 | 6.2% | 5.8% | 82 | 9.4% | 8.8% |
| 33 | 5.1% | 4.4% | 58 | 6.3% | 5.9% | 83 | 9.7% | 9.1% |
| 34 | 5.2% | 4.4% | 59 | 6.4% | 5.9% | 84 | 10.1% | 9.4% |
| 35 | 5.2% | 4.5% | 60 | 6.4% | 6.0% | 85 | 10.4% | 9.7% |
| 36 | 5.3% | 4.5% | 61 | 6.5% | 6.0% | 86 | 10.8% | 10.1% |
| 37 | 5.3% | 4.6% | 62 | 6.6% | 6.1% | 87 | 11.1% | 10.4% |
| 38 | 5.3% | 4.6% | 63 | 6.6% | 6.1% | 88 | 11.4% | 10.8% |
| 39 | 5.4% | 4.7% | 64 | 6.7% | 6.2% | 89 | 11.7% | 11.2% |
| 40 | 5.4% | 4.7% | 65 | 6.7% | 6.3% | 90 or over | 12.0% | 11.5% |
| SOURCE: American Council on Gift Annuities | ||||||||
