For almost 30 years, the IRS has announced each month the interest rate for computing the deduction for gift annuities, charitable remainder trusts, and most other split interest gifts. We call this rate the IRS discount rate. The donor has the option to use the rate for the month of gift or either of the two previous months.
The IRS has announced proposed regulations to address a technical, but potentially very important issue for taxpayers who make large taxable gifts during 2018-2025. The 2017 Tax Act nearly doubled the unified gift and estate tax exemption from $5,600,000 to $11,180,000. However, absent extending legislation, the doubling will expire at the end of 2025 and the exemption will go back to being computed the way it was prior to the 2017 Tax Act. Any of the increased exemption not used before it expires will be lost. This brings us to the technical part of the discussion.
Among the many changes wrought by the tax law passed at the end of 2017, one welcomed by the charitable community was the increase in the deduction limit on gifts of cash to public charities from 50% of a donor’s adjusted gross income (AGI) to 60%. We have read this section of the new law carefully and determined that the application of the 60% limit is more complicated – and, well, limited – than many realize. We lay out below how we understand the 60% limit should be applied and how it interacts with the 30% and 50% limits.
On May 15, 2018, the American Council on Gift Annuities (ACGA) announced new suggested maximum gift annuity rates to replace the rates that became effective on January 1, 2012. The new rates will apply to gift annuities established on or after July 1, 2018. The new suggested maximum rates are moderately higher than the ones they replace. The new rates were set with the goal of 50% of the funding amount remaining for the charity on average. The rates also ensure a 20% present value and a contribution value of at least 10% of the funding amount at all ages down to an IRS discount rate of 2.8% (as compared to 1.4% under the January 1, 2012 rates). These additional criteria cause the maximum rates suggested for very young ages (under 20) to be lower than they otherwise would be.
You undoubtedly are aware that among the changes found in the new tax law is a doubling of the lifetime exemption for federal gift, estate, and generation skipping transfer taxes. This doubling is effective January 1, 2018 and is set to expire December 31, 2025.