Our Client Services staff regularly takes client calls that go something like this: Client: I think your software is giving me the wrong deduction. PG Calc Client Services: Can you please explain what you mean? Client: Sure. My donor is 75 years old, so her life expectancy is 11.1 years using the 2000CM mortality table. I know the deduction calculation uses the 2000CM table but when I compute the deduction for a 5% unitrust with a fixed term of 11.1 years, I get a lower deduction than when I compute the deduction for the same unitrust that lasts for my donor’s lifetime. That doesn’t make sense! It does, actually. Let me explain.
Annuity 2000. 2012 IAR. 1983 Basic. 2000CM. Perhaps you are familiar with one or more of these terms. They are the names of mortality tables that are important to planned giving calculations of one kind or another. With so many different mortality tables in play, it’s no wonder that gift planners get confused about which table is used for what purpose and why . . . to the extent that they think about them at all. To help dispel the confusion, I briefly describe below what a mortality table is and the specific use and characteristics of the four mortality tables that gift planners need to be most aware of.
A 70 year-old wants to fund a 5% charitable remainder unitrust with $500,000. If he receives payments for the rest of his life, he gets a charitable deduction of $261,815. On the other hand, if he chooses to receive payments for exactly his life expectancy of 14.2 years, he gets a deduction of $244,060. Strange. Why aren’t the two numbers the same?
On December 30 of last year, National Public Radio aired a segment on All Things Considered with the headline, “Charitable Giving Sees Big Bump In 2016.” Among the indications noted by reporter Pam Fessler that 2016 would be a good year for fundraising, $168 million was donated nationwide on Giving Tuesday, a 44% increase over the previous year.
After six years of drifting around in record-low territory, the Applicable Federal Rate, otherwise known as the IRS discount rate, has leaped upward 0.6% this month to 2.4%. That’s the highest the rate has been since mid-2014. The leap was a direct consequence of the Federal Reserve raising its target for the Fed Funds rate in mid-December. What’s more, the Fed has indicated it expects to raise the Fed Funds rate in increments three more times during 2017. That would portend further increases in the IRS discount rate over the next 12 months.