IRS Announces New Mortality Table for Computing Planned Gift Deductions

On May 5, the IRS finally published proposed regulations that update the mortality assumptions used to compute the value of annuity interests, unitrust interests, income interests, and life estates. The updated mortality table, 2010CM, is based on data from the 2010 U.S. Census. The current mortality table, 2000CM, is based on data from the 2000 U.S. Census. It has been 13 years since 2000CM went into effect, despite a Section 7520 requirement that the mortality table for valuing annuity interests, etc. be updated no less than every ten years.

Update: On June 1, 2023, the IRS made public final regulations governing the use of 2000CM and 2010CM. The finalized rules are discussed here.

Size of Effect of Choosing 2010CM vs. 2000CM for Deduction Calculations

The IRS mortality table affects the charitable deduction available for planned gifts that last for one or more lives. This list includes all gift annuities and pooled income fund gifts, most charitable remainder trusts and retained life estates, and, rarely, charitable lead trusts. Planned gifts that last for a fixed term of years are not affected. Also, the mortality table used to determine how long a portion of gift annuity payments will be considered tax-free and/or capital gain has not changed.

As you would expect, Table 2010CM predicts lower mortality than Table 2000CM. That is, it predicts that people will live longer than Table 2000CM does. If people are expected to live longer, then they are also expected to receive more payments from a gift annuity or charitable remainder trust, or to live longer in a home subject to a retained life estate. More payments mean less value for the charity and, hence, a lower charitable deduction for the donor.

The tables below give you a sense of how much less. They assume May’s IRS discount rate of 3.0% and quarterly payments.

$100,000 Charitable Gift Annuity Paying ACGA Rate

$100,000 Charitable Remainder Unitrust with 5% Payout Rate

The reduction in charitable deductions is moderate and lessens as the age of the annuitant or income beneficiary increases. To put the size of the effect into perspective, the recent spike in the IRS discount rate more than compensates for the lower mortality found in Table 2010CM. For example, the deduction available to a 75-year-old donor of a $10,000 gift annuity is $4,882 using April’s 2.2% IRS discount rate and Table 2000CM. It is $4,998 using June’s 3.6% IRS discount rate and Table 2010CM. Unitrust deductions are affected very little by the IRS discount rate, so the deduction decrease due to Table 2010CM may be more noticeable for these gifts.

Current Mortality Table Will Remain Available for at Least a Few Months

Per the proposed regulations, Table 2010CM will be effective on the first day of the month following the publication date of final regulations. Until then, donors who make gifts on or after January 1, 2021 may choose to value their charitable contribution using either Table 2000CM or Table 2010CM. To be eligible to choose 2010CM for calculations, the IRS discount rate used in the calculations must be for the month of January 2021 or later. Public comments on the proposed regulations are due by July 5, 2022, so the IRS will not publish final regulations until sometime after that. We won’t hazard to guess how long after.

It is worth noting that the definition of the effective date of Table 2010CM and the start date of the transition period could be revised in the final regulations. The start date for the transition period could be made earlier, for example, under the theory that Table 2010CM was supposed to be published no later than May 1, 2019.

Which Mortality Table Should Your Donor Choose?

Wait for it . . . It depends.

A donor who funds a CRAT or CRUT between 1/1/2021 and when 2010CM becomes effective will receive a larger charitable deduction by opting to use the current mortality table, 2000CM. Likewise for the donor of a retained life estate or the donor to a pooled income fund.

The decision is less obvious for a gift annuity donor. It will depend on whether the donor is more interested in maximizing the charitable deduction or the portion of the annuity that will be tax-free during their life expectancy. Using 2000CM in the calculations will maximize the gift annuity donor’s deduction but minimize the tax-free portion of their annuity payments. Using 2010CM instead will do the reverse: minimize the donor’s deduction and maximize the tax-free portion of their annuity payments. The decision may be easiest for the gift annuity donor who does not itemize her deductions. In this case, the deduction provides no tax benefit, so the donor will be wise to choose 2010CM for the calculations. Doing so will maximize the tax-free portion of the annuity payments, which will save the annuitant taxes, whether she itemizes or not.

What about the annuitant or income beneficiary who wishes to make a new gift by assigning her annuity or income interest to charity? For the donor of a gift annuity interest, the choice of mortality table likely will not matter. The deduction available is the present value of the annuity or the total of the undistributed tax-free and capital gain portions of the annuity, whichever is less. The choice of mortality table will affect the present value of the annuity, but in most cases the total of the undistributed tax-free and capital gain portions will be the lesser amount and therefore determine the donor’s deduction.

For the donor of an income interest in a charitable remainder trust, choosing 2010CM for her calculations will be the way to go. It will produce a greater charitable deduction than choosing 2000CM would. As with the charitable deduction, the older the donor when she gives her income interest to charity, the smaller positive effect choosing 2010CM will have on the valuation of the income interest.

Consider Providing Updated Calculations Where Beneficial to the Donor

As explained above, there are situations where it will be to the donor’s benefit to use Table 2010CM in calculations rather than Table 2000CM. If you have already provided calculations to the donor of a gift annuity in 2022, for example, consider providing calculations based on Table 2010CM along with an explanation that using the new calculations will decrease the donor’s charitable deduction and increase the tax-free portion of her payments. The donor will need to let you know which calculations she will use on her tax return so that your charity can issue accurate 1099-Rs each year.

For donors of planned gifts in 2021, there could be instances where it will be worth the time and expense for the donor to amend her tax return to use calculations based on Table 2010CM. The most likely candidates will be donors of a large income interest in a charitable remainder trust, since that is the situation where choosing Table 2010CM rather than Table 2000CM will increase the donor’s deduction, possibly by many thousands of dollars in the case of a large trust. Whether the increase is enough to warrant amending the donor’s tax return is a question for the donor and the donor’s advisors to answer.

Is There a Marketing Opportunity?

One could argue that change always presents a marketing opportunity. In this case, shortly after final regulations are published (presumably later this year, but we don’t really know), the charitable deduction for planned gifts that last for one or more lives will have to be based on Table 2010CM. Until then, donors can continue to use Table 2000CM for these calculations. Using Table 2000CM will result in a larger charitable deduction in most cases. Although we don’t know exactly when the option to use Table 2000CM will expire, the clock is definitely ticking, which may be enough to persuade donors who have been considering a gift to act while Table 2000CM is still available.

Donors considering a gift annuity may want to wait until July 1, after which the new higher ACGA rates will be available. Donors considering a charitable remainder unitrust or pooled income fund gift don’t have a similar reason to delay. Given the recent trend of a rising IRS discount rate, donors considering a retained life estate have even more incentive to act quickly, since the donor’s deduction will go down as the IRS discount rate goes up, and will go down even more once calculations based on Table 2010CM become the only ones allowed.

When Will PG Calc Software Be Updated?

We will be updating PGM Anywhere and PGM desktop on June 2 to incorporate the new ACGA annuity rates that will become effective July 1. We plan to add Table 2010CM to PGM Anywhere shortly thereafter and to PGM desktop later this summer. For gift dates on or after January 1, 2021, you will be given the choice of performing calculations using Table 2000CM or Table 2010CM. We plan to make Table 2010CM available for doing calculations in GiftWrap by mid-June.

Relevant Links

IRS tables for valuing of annuity interests, unitrust interests, income interests, and life estates based on 2010CM: https://www.irs.gov/retirement-plans/actuarial-tables

Full text of proposed regulations: https://www.govinfo.gov/content/pkg/FR-2022-05-05/pdf/2022-02303.pdf