Gift Annuity Contracts Filed with State Regulators and the Legacy IRA Act

As we’ve discussed in other blog posts, it is now possible to use a qualified charitable distribution (QCD) from an IRA to fund a charitable gift annuity (CGA). Among the specific requirements set forth in Section 307 of the Consolidated Appropriations Act, 2023 (“the Act”) is that the “income interest” of such an annuity be non-assignable. Our interpretation of the Act is that the income interest in a CGA may not be assigned to anyone, including the issuing charity. Many gift annuity agreements, including those included in PG Calc’s PGM Anywhere and Planned Giving Manager (desktop) software, provide that the annuity is non-assignable “except that it may be assigned to the charity.” That exception is specifically provided for in Reg. Sec. 1.1011-2(a)(4)(ii), which allows for ratable reporting of capital gain when a long-term capital gain asset is used to fund a CGA if the annuity is non-assignable or only assignable to the charity issuing the CGA.

Analysis of the New 2023 ACGA Annuity Rates

On November 23, 2022, the American Council on Gift Annuities announced that it would be increasing its suggested maximum annuity rates, effective January 1, 2023 (the “new rates”). We now know the details of the new rates, which the ACGA made public on December 19, 2022. The new rates replace the rates that became effective July 1, 2022 (the “current rates”). The ACGA’s decision to increase its suggested maximum gift annuity rates was triggered by the sharp rise in interest rates that started in March and has continued since July.

What's the Impact of Rising Discount Rates on Charitable Deductions?

In May, the IRS discount rate (also known as the AFR, or Applicable Federal Rate) made its largest monthly increase since June 2004, rising from 2.2% to 3.0%. Your donors might be viewing this increase with dismay, as it makes new debt more expensive, from credit cards to home mortgages. But there is a reason to celebrate this increase, as it also increases the charitable deduction for the most popular life income gifts: charitable gift annuities and charitable remainder trusts.

A Gift Annuity Is Not a Mortgage

We occasionally receive calls from clients regarding questions about the best way to perform internal accounting for charitable gift annuities. As a split-interest charitable gift arrangement, the CGA represents both a gift to the charity and a financial obligation to the annuitant(s). On this much, there is general consensus, but on the manner in which the charity should compute the estimated remaining liability for each CGA over time, there are two main approaches. Given that the total funding minus the charitable deduction equals the total estimated liability at the outset of the gift arrangement, some organizations choose to record the incremental changes in liability as a sort of mortgage payment plan, or straight-line depreciation schedule. This method essentially amortizes the total estimated liability at the beginning and breaks that total down into regular and consistent annual amounts (sometimes even quarterly amounts). There is a fundamental problem with this approach; A...