Poor Economy Prompts Change to Gift Annuities

Responding to the troubled economy during the pandemic, a nonprofit umbrella group is recommending that charities reduce the amount of money donors receive in exchange for creating charitable gift annuities.

Gift annuities are charitable contributions that provide donors with a fixed payment from the gift’s investment during their lifetime, a sum that the donor and the charity agree upon in a contract. Donors also receive a tax break for their gift. Upon the donor’s death, the total remaining funds are transferred to the charity.

The American Council on Gift Annuities recommends that charities decrease the maximum payout rates for new gift-annuity donors by 0.3 to 0.5 percentage points, depending on the donor’s age, effective July 1.

The changes mean a donor who creates a new a $10,000 annuity may receive $30 to $50 less in payment, depending on the donor’s age and gift contract with the charity. Younger donors typically receive lower payout rates, given that the charity expects to fund payouts from their gifts over a longer period of time.

The council — a group of planned-giving professionals — has suggested similar rate changes during past economic downturns. During the Great Recession, for example, it responded to the double threat of a weak economy and low interest rates by reducing its suggested payout rate for donors. That 2009 change meant that a donor who created a new $100,000 gift annuity would receive a net annual payout that was $400 to $700 lower than the payout for a gift of the same size made before the change. The group recommends reducing payout rates to ensure that most charities claim at least half of a charitable-gift annuity’s value after its donor dies.

“The ultimate goal for the remainder to the charity doesn’t change,” said Dave Ely, vice president for rates and regulations and the council and portfolio manager at the investment firm Brown Advisory.

“Because we think the rate returns are going to be marginally lower because of the decline in interest rates, we had to reduce the suggested payouts.”

This is the group’s second change to the suggested maximum payout rate in six months. In November, the council moved to decrease the suggested share by 0.4 to 0.5 percentage points. That change went into effect January 1, when the 10-year Treasury yield was about 1.8 percent. By May, however, that rate had plummeted to 0.6 percent, further decreasing bond values.

“It’s really been the decline in interest rates and expected returns going forward out of the bond market that has pushed the ACGA to be a little bit more conservative in our return assumptions,” said Ely.

Some donors who are interested in creating new charitable gift annuities may choose to make their gifts before the suggested maximum payout rates decrease again in July, but not all of them will make that choice, Ely says.

Some will make a gift because of the revenue from their donation. The lifetime payout from gift annuities can encourage significant charitable contributions even from donors who don’t have a clear picture of how much they’ll be earning in the future, Ely says. What’s more, once a gift-annuity agreement is signed, the payout rate is fixed. Even if the market worsens, the charity is contractually obligated to make sure donors receive payments.

Under the new suggested rates, the share of the gift paid to the donor will decrease over time, but the value of the gift to the charity will increase. This means donors can claim a bigger tax deduction for charitable gift annuities made after July 1. That tax break, Ely says, may motivate some donors to wait make these gifts until the new payout recommendations take effect.