Turbulent economic times could provide a history lesson for younger generations as soaring inflation of the past year and supply chain issues drive up the cost of most goods. Members of Generation X were only young kids during the hyperinflation of the 1970s. Generation Z has virtually no experience with high inflation and its members have only known historically low interest rates of the past decade.
As Millennials enter their prime giving years with interest rates climbing, it might be an opportune time for planned giving professionals to reintroduce donors to Charitable Gift Annuities (CGA) and Charitable Remainder Trusts (CRT).
Responding to gyrations in the economy, the board of the American Council on Gift Annuities (ACGA) in May approved an increase in its recommended maximum gift annuity rates — the first since 2018 and only the third hike in 25 years. The increase went into effect this past July 1, going up between 0.4% and 0.6%, depending on the age of the beneficiary.
The rise in the 10-year U.S. Treasuries triggered an examination of the model that ACGA uses to produce the recommended maximum gift annuity rates, according to ACGA Board President Joe Bull. The model incorporates a variety of factors, including interest rates.
The board “continuously monitors the assumptions underlying its suggested maximum rates,” Bull wrote in a letter to members, including:
• A target gift for charity at the conclusion of the gift annuity contract equal to 50% of the funds contributed for the gift annuity;
• An annuitant mortality assumption equal to 45% male/55% female blend of mortality under the 2012 Individual Annuity Reserving Table;
• An annual gross investment return expectation of 4.5% on the charity’s gift annuity funds; and,
• An expense assumption of 1% per year.
Previous suggested maximum rates were based on a 3.75% investment return expectation, according to Bull. As part of its recommendation function, the ACGA conducts a mortality study every 10 years. The most recent study, released at the ACGA conference this past April, is the largest mortality study that the organization has ever conducted. It analyzed more than 50,000 gift annuities from 31 organizations making payments to almost 32,000 unique annuitants between 2015 and 2019. The data were the basis for changing the gender mix assumption to 45% male/55% female from the previous 50/50 mix.
The new suggested charitable gift annuity rates are higher, so that might attract some interest, according to Russell James, Ph.D., the CH Foundation Chair in personal financial planning and director of graduate studies in charitable planning at Texas Tech University in Lubbock, Texas. “If nothing else, change is good because it creates a reason to talk about the instruments and every time we talk about them new people learn about them as an option.”
Higher interest rates also make CRTs more attractive. People commonly become more attracted to the Charitable Remainder Unitrust because it pays a fixed share of anything in the trust so the payment can grow with increased interest rates, James explained.
“Inflation also creates nominal appreciation, even if assets aren’t actually worth that much more in terms of purchasing power. This nominal appreciation, however, means there is a capital gain if the item is sold,” he added. Avoiding this capital gain is possible if the asset is donated instead of sold, and this also applies to assets given to a Charitable Remainder Trust.
The higher rates can also make Charitable Remainder Annuity Trusts more attractive, even though they pay a fixed dollar amount for life, or the period of time, James said. Like the CGA, the higher interest rates do allow for higher payments from those Charitable Remainder Annuity Trusts that are set up now.
Since the increase in ACGA rates, The Salvation Army has worked with donors to fund “several larger-than-usual gift annuities,” according to Dale Bannon, national community relations and development secretary at The Salvation Army USA in Alexandria, Va.
The four U.S. territories manage hundreds of millions of dollars in gift annuities and charitable trusts. The Salvation Army’s Eastern Territory has the smallest of the CGA and CRT funds at about $90 million, with about 500 annuitants and beneficiaries.
It’s much more likely that rising inflation across the board and the uncertainty about the direction of investments, is pushing people to have deeper discussions with their advisors, and making them more open to various options. “CGAs and CRTs deliver many attractive income tax benefits, and those benefits often help provide retirement income for themselves and/or their spouses or living income for the next generation,” Bannon said.
By focusing on CGAs, CRTs, and other giving methods which do not drain cash required to pay ordinary living expenses, can result in increased giving during difficult financial times, such as we are facing now, Bannon said.
Scott Janney, director of gift planning for The Salvation Army USA Eastern Territory, located in West Nyack, N.Y., recalled asking a donor who supported a charity where he worked in the past, why his annual giving had gone up so much after funding a multimillion-dollar CRT. After funding the CRT, the donor said he had so much more spending money. “The donor had essentially converted a valuable asset that was not paying income into a useful cash flow for the remainder of his and his wife’s lives,” Janney said.
“Right now, at least as I’ve seen it, people are concerned but [donors] aren’t panicked yet,” said the ACGA’s Bull, who is vice president and chief advancement officer at Wilmington College in Wilmington, Ohio, and principal of Columbus, Ohio-based Philanthropy Advisory Counsel (PAC).
Bull started in planned giving in 1985 and remembers relatives who were “happy as a clam” to get interest rates of 17% on their mortgage at that time, when hyperinflation was just beginning to cool down. “I don’t see people behaving today like people behaved then,” he said. “Things were moving so fast, people were jumping on stuff like crazy,” but donors seem less panicky now. “It’s something to keep an eye on going forward, depending on how long this goes,” he said. If inflation continues at 8% or 9% for another 12 to 18 months, behaviors might begin to change.
Something to keep an eye on is the resurgence of pooled income funds, according to Bull. When he started in 1985, people debated whether to establish a CGA or donate to a pooled income fund, a type of charitable mutual fund created from a donation to a charity that’s then invested to produce dividends for the donor and the charity.
Because inflation and interest rates were so high back then, Bull said pooled income funds were significantly more popular at the time because CGAs have much more conservative interest rates. Back then pooled income funds were able to invest in U.S. Treasuries that offered rates upward of 14%. “So when rates started falling, pooled income funds then can only pass out what interest they earned,” Bull said. No one’s interested in 2% on pooled income funds but if rates and inflation stay that high, “it will be interesting to see what charities do with their pooled income funds.”
People are concerned about the rise of inflation but “not to the point that I’ve seen it affect their behavior,” Bull said. “Older donors lived through it but it is 40 years ago.” There was a time in the 1980s that rates were modified every year because “inflation was going crazy,” at one point even increasing twice in a year. “That’s kind of unheard of,” Bull said, adding that ACGA has a history of being conservative and consistent in an effort to keep rates stable.
Inflation and interest rates also impact Section 7520 IRS monthly interest rates related to the charitable deduction. Those monthly rates started the year at 1.6% and jumped to 3.6% by June. It had been as low as 0.8%.
“When it goes up that much, that affects the calculation for how much you can deduct. The higher that rate, the more you can deduct” for creating a CGA or CRT, Bull said. The amount of deduction goes up, might actually increase the interest, particularly for people setting up CRTs, which had been fairly flat since the tech bubble burst. “There was a period in the 1990s, we were working on CRTs every other week, they were that popular with donors,” Bull said. Then the tech bubble popped and people’s interest in CRTs went with it as rates plummeted and the tax deduction wasn’t there.
The rise of donor-advised funds (DAF), along with lower interest rates, really pushed the CRT to the back burner, Bull said, adding that money that was going into CRTs is going into DAFs because CRTs have a floor and can’t pay out less than 5%. “It’ll be interesting to see how that changes, if interest rates stay high. “Going forward, if rates stay high, will there be a resurgence of popularity in pooled income funds and CRTs, because of that?”
Mark Hrywna is the former senior editor of The NonProfit Times.
