I was using Planned Giving Manager recently to check values in a table of gift annuity deductions. To my surprise, my results differed markedly from the values in the table. Although I noticed that there was a small difference between the IRS discount rate I used (2.2%) and the one used in the table (1.8%), the difference in deductions was so great that I was worried that I had stumbled upon a bug. Not so. It turned out that the small difference in IRS discount rates was the whole story.
With some experimenting, I’ve identified two patterns:
- The younger the annuitant, the greater the effect of changing the IRS discount rate. The effect is accentuated when there are two annuitants.
- Deferred gift annuities are affected more dramatically than immediate payment gift annuities.
The tables below show how some sample gift annuity deductions change when the IRS discount rate (AFR) changes from 1.8% to 2.2%, the lowest and highest rates available for gifts made in April 2016.
Immediate Payment Gift Annuity Funded with $10,000
|
Age |
Deduction (AFR=1.8%) |
Deduction (AFR=2.2%) |
Increase in Deduction |
|
70 |
$3,798 |
$4,002 |
5.4% |
|
80 |
$4,850 |
$4,965 |
2.4% |
|
90 |
$6,217 |
$6,269 |
0.8% |
|
70/70 |
$2,832 |
$3,100 |
9.5% |
|
80/80 |
$4,181 |
$4,329 |
3.5% |
|
90/90 |
$5,155 |
$5,232 |
1.5% |
Deferred Gift Annuity Funded with $10,000
|
Age |
Years of Deferral |
Deduction (AFR=1.8%) |
Deduction (AFR=2.2%) |
Increase in Deduction |
|
50 |
15 |
$2,495 |
$3,197 |
28.1% |
|
55 |
10 |
$2,799 |
$3,344 |
19.5% |
|
60 |
5 |
$3,063 |
$3,461 |
13.0% |
|
50/50 |
15 |
$986* |
$1,865 |
89.1% |
|
55/55 |
10 |
$1,485 |
$2.164 |
45.7% |
|
60/60 |
5 |
$1,983 |
$2,478 |
25.0% |
You can see that the difference in the deduction is remarkably large for a deferred gift annuity for two 50 year-olds who will defer payments until they turn 65 – the deduction nearly doubles with just a 0.4% increase in IRS discount rate! In fact, the deduction using 1.8%, $986, is so low that it is less than 10% of the funding amount and the gift annuity would not qualify. The effect is less dramatic, but still very substantial, when the ages of the deferred annuitants increases and the deferral period shortens.
Although the IRS discount rate has been remarkably stable over the last two years – ranging between 1.8% and 2.2% during that time – even small movements can make a surprisingly large difference in the charitable deduction, especially for deferred gift annuities with annuitants on the young side. Keep this fact in mind when working with your gift annuity prospects.
Submit a Comment