5 Terms Every Gift Planner Should Know

In the realm of gift planning, there are a number of terms that we use often. For those new to gift planning or those looking for a refresher, this is the first in a series of articles entitled: “5 Terms Every Gift Planner Should Know.”  

1.) ACGA Rates

The American Council on Gift Annuities (ACGA) – is a national organization of charities that promotes charitable gift annuities.  One of its functions is that it issues tables of suggested maximum annuity rates that member charities should offer to their donors. The rates vary with age: the older the annuitant or annuitants, the higher the suggested maximum annuity rate.

The ACGA reviews its annuity rate tables periodically to see if they need adjusting. The ACGA sets rates with the goal that on average about 50% of the gift amount will remain when the gift terminates.  This is known as a 50% residuum.  Beginning with the rates effective 7/1/2011, the ACGA has added a second goal when setting rates, which is that the present value of the residuum at the time of the gift be at least 20% of the funding amount.

2.) Actuarial Age

A person's actuarial age for computing a charitable deduction and choosing an ACGA suggested gift annuity rate is his or her age on the birthday that is closest to the date of gift.

3.) IRS Discount Rate

Also known as the AFR or Applicable Federal Rate, the IRS discount rate is used to determine the charitable deduction for many types of planned gifts, such as charitable remainder trusts and gift annuities. The rate is the annual rate of return that the IRS assumes the gift assets will earn during the gift term.

The IRS discount rate is published monthly.  It is announced on about the 20th of the month that precedes the month to which the rate will apply.  It equals 120% of the annual mid-term rate, rounded to the nearest 0.2%. The annual mid-term rate is the annualized average yield of treasury instruments over the past 30 days that have remaining maturities of 3-9 years.

The higher the IRS discount rate, the higher the deduction for charitable remainder trusts and gift annuities, and the lower the deduction for charitable lead trusts and retained life estates.  Fluctuations in the IRS discount rate affect unitrust deductions far less than annuity trust and gift annuity deductions.  IRS discount rate fluctuations don't affect pooled income fund deductions.

4.) Cost Basis

Cost basis is the amount that a person paid for an asset.

The cost basis of cash equals the face value of the cash. The cost basis of inherited property equals the fair market value of the property at the time it was inherited. The cost basis of property received as a gift from a living person equals the cost basis of the person from whom the property is received.

A person's cost basis may be adjusted for tax purposes to account for depreciation taken on previous tax returns.

5.) Annuity Reserves

Annuity reserves are the assets a charity needs in order to finance its gift annuity payment obligations. The amount of reserves needed to finance each gift annuity depends on the size of the annuity payments, the ages of the annuitants, and the mortality table and interest rate used.

Many charities compute annuity reserves for their own internal purposes to make sure that they have ample funds on hand to make annuity payments now and in the future.

Some states that regulate gift annuities require charities that issue gift annuities in their state to submit annuity reserve reports annually.  They do so to ensure that the charities are maintaining adequate reserves to finance their annuities. 

Please comment if there are terms you’d like defined by the experts at PG Calc.