Over the past few months, the monthly IRS discount rate has begun to stabilize. Those who prepare planned gift charitable deduction calculations will be familiar with this rate as it is used to determine the tax benefits for many types of planned gifts. This rate is sometimes called the “Section 7520,” or AFMR (applicable federal mid-term rate).
Fluctuating AFMRs—a hindrance to giving?
Large rate fluctuations can affect the accuracy of marketing materials and proposals, thereby creating an air of uncertainty that can have a chilling effect on gift activity. Imagine the reaction of major gift prospects when they are informed that a gift proposed several months earlier “won’t work” anymore, or they learn that if they had completed a gift today their benefits would be much higher than the same gift completed three months ago. The dip in irrevocable deferred gifts for the last year reported by some studies, for example, may have been caused in part by a low interest rate environment at that time. (See the July 2000 Give & Take for more on giving statistics for 1999.)
Stability offers opportunity
Fortunately we are now experiencing a period of relatively stable rates. Since February 2000 the IRS discount rate has averaged 8.0%. Relatively stable interest rates at higher levels create an environment more attractive to the completion of various split-interest planned gifts. Today’s AFMR is somewhat analogous to the porridge in the fable of Goldilocks and the Three Bears—“not too hot, not too cold, but just right.”
For example, under a discount rate of 5.4% in effect as recently as December of 1998, the maximum rate a charitable remainder annuity trust for a period of 20 years could pay and qualify under the 10% minimum charitable deduction requirement introduced in the 1997 Tax Act would have been 7.3%. Under today’s discount rate, an 8.6% CRAT for a 20-year term will qualify.
For this reason, past experience shows that we can expect to see an increase in the number of relatively high payout annuity trusts for terms of years or for the lifetime(s) of relatively younger persons. Current discount rates also increase the tax deductions for annuity trusts and gift annuities for older persons who would like to make significant gifts while locking in a generous retirement income supplement.
Stick with basics
Gift planning solutions in today’s interest rate environment, as always, must be tailored to the specific situation to best help donors reach personal and philanthropic objectives. Accomplishing this often requires an interdisciplinary team of attorneys, accountants, trust officers, and other gift planning professionals working together to accomplish a result that is in the best interest of all concerned.