Historically low interest rates offer unique opportunities for charitable giving
The unexpected onslaught of COVID-19 has produced many responses – including the Federal Reserve reducing interest rates to historic lows. One key interest rate — known as the IRS discount rate (or Internal Revenue Code section “7520 rate”) — directly affects the deduction value of certain types of charitable gifts. The last time this rate approached current levels was in August 2012, when it dropped to 1.0% due to the lingering effects of the Great Recession.
Now, for the breaking news…
The IRS recently announced that the May 2020 IRS discount rate will be 0.8%. This rate can be used through July 2020 for charitable tax deduction calculations and, let’s face it, interest rates may not rise significantly for some time.
For a broader historic perspective, please see our January 2017 blog post about the impact of low interest rates, What goes down must come up: The impact of low interest rates on philanthropy.
So, what types of charitable gifts are more attractive when interest rates are low?
1. Charitable lead annuity trusts (CLATs) — There are several types of charitable lead trusts (“annuity,” “unitrust,” “grantor,” and “non-grantor”) and any of these pay a charity for a term (measured either by a person’s life or, more often, a specific number of years) after which the assets either go to loved ones or are returned to the donor (“grantor”). A charitable lead annuity trust (“CLAT”) is especially attractive to donors when interest rates are low because it requires a lower annual payout from the CLAT to charity to produce the desired tax deduction for the donor. With a “non-grantor” CLAT, this translates into more assets left to loved ones when the CLAT term ends. With a “grantor” CLAT, this translates into a higher principal value returned to the donor at the end of the CLAT’s term.
Overviews for donors: non-grantor charitable lead trusts and grantor charitable lead trusts
Forbes article about a non-grantor CLAT for Duke: Precision Wealth Transfer with a CLAT
Overview for Professional Advisors: Charitable Leads Trusts — An overview of types of CLTs
2. A retained life estate (RLE) in a home or a farm — Low interest rates produce a higher current income tax deduction for donors. The donor, or other “life tenant” named by the donor, continues to use and enjoy the home or farm for life or a specific number of years selected by the donor.
Overview: FAQs: tax-wise real estate gift options
3. New charitable gift annuities (CGAs) — Low interest rates produce a fixed CGA payment with a higher tax-free portion. Donors who do not itemize their deductions may wish to consider using the lowest IRS discount rate available at the time they fund a CGA. A current or deferred payment CGA may be especially attractive to charitable gift donors when other fixed income opportunities offer lower returns.
Overview for donors: Charitable Gift Annuities
4. A disclaimer of a donor’s income interest in an existing charitable remainder trust (CRT) — Low interest rates produce a higher current income tax deduction for CRT income beneficiaries who disclaim their CRT income interest. This also allows the CRT assets to immediately support the charitable purpose selected by the donor.
Learn about these gift options to meet your financial and philanthropic goals
For more information about interest rates or charitable giving opportunities, please contact our gift planning team.
Additional sources for information about these topics:
Grantor Charitable Lead Trusts: Why They (Sometimes) Make Sense from PG Calc
Donate Your House & Keep The Keys: Retained Life Estate from Gordon Fischer Law Firm
Retained Life Estates and Remainder Interests in Homes and Farmlands from VISUAL PLANNED GIVING: An Introduction to the Law and Taxation of Charitable Gift Planning by Russell James III, J.D., Ph.D.
Surrendering an Income Interest in a Life Income Gift (Including Partial Surrender) from PG Calc
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