Extremely Low IRS Discount Rate Creates Opportunities and Challenges

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.



A very low IRS discount rate means a very high charitable deduction is available to donors of charitable lead trusts and retained life estates. If you have been in discussions with a donor about either of these gifts, now would be a good time to let them know that August- October will be a particularly advantageous time to make their gift. After that, the 1.4% rate may or may not still be available.


In contrast, a very low IRS discount rate will reduce the deduction available for a charitable remainder trust or gift annuity. There is a trade-off for gift annuities, however: when the deduction value goes down, the tax-free portion of payments goes up in the same proportion. As a general rule, it is good practice to ask each gift annuity donor which is more important to her, maximizing the deduction or maximizing the tax-free portion of the annuity.

Most charities follow the gift annuity rates currently suggested by the American Council on Gift Annuities (ACGA). That’s good news, because those charities are on safe ground with respect to the legal requirement that the charitable value of the arrangement be at least 10% of the gift amount. The current ACGA rates were set so that they would always pass the 10% deduction test for IRS discount rates of 1.4% or higher. Should the IRS discount rate descend below 1.4% for three or more months, then there may be instances when following the ACGA rate fails the 10% deduction test, but it will tend to be at ages much younger than the typical gift annuity donor.

The same cannot be said for deferred gift annuities (DGAs). At an IRS discount rate of 1.4%, it is possible to follow the ACGA rate for a DGA and fail the 10% deduction test. This is especially true when there are two annuitants.  For example, if the annuitants are both 55 and defer payments to 65, the gift will fail the test. The same DGA doesn’t fail the test when you use July’s 1.8% rate instead. If you run into this issue, the solution is to either defer payments longer or reduce the annuity rate offered, or both.


Will the IRS discount rate stay at 1.4% or go even lower? In the short term of the next few months, who knows? Over the longer term, interest rates will almost certainly move upwards in general and the IRS discount rate will move up with them. Given all the nervousness regarding the U.S. and world economies, it is likely to be a slow process.

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