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.
The monthly IRS discount rate dipped to 1.4% for August and has stayed there for September. Although this rate has been at historically low levels since 2008, it hasn’t been this low in over three years. The extremely low IRS discount rate creates opportunities and challenges.
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.