What goes down must come up: The impact of low interest rates on philanthropy

In an effort to stimulate the U.S. economy following the onset of The Great Recession in 2008, the Federal Reserve Bank reduced interest rates to historic lows. Post-2008 fixed income investments—including bonds, Certificates of Deposit, and money market funds—fell dramatically and investors who relied heavily on those assets suffered the most. Likewise, the payout rates and deduction benefits from interest sensitive charitable gifts went lower.

One key interest rate—known as the Applicable Federal Rate (AFR) or I.R.S. discount rate— directly affects the deduction value of certain types of charitable gifts. For historic perspective, consider that today’s interest rates are much lower than they were in 1952. A fixed AFR rate was used prior to the monthly change in AFR rates that began in May 1989, and was adjusted periodically as an add-on to tax legislation.

The AFR rate hit an all-time low of 1.0% in August 2012 and remained at, or near, this level for years thereafter. But, to quote Nobel Prize winner, Bob Dylan (honestly, I never dreamed I would write those words), “The times they are a-changin’…”

On December 14, 2016, the Federal Reserve raised interest rates by a relatively modest 0.25%, but the ripple effect was far greater. In one month, the AFR rate jumped from 1.8% to 2.4% (a 25% increase). Although rates remain near historic lows, the Federal Reserve has indicated that rates will likely continue to rise in the coming months and years. These rising interest rates may prove to be beneficial for donors who are considering certain types of charitable gifts… but not all.

So what are the current windows of opportunity for charitable gifts while interest rates remain low? Donors can still use the December 2016 AFR rate of 1.8% through the end of February 2017.

The greatest benefits for donors can be seen in the following types of planned gifts:

  1. A charitable lead annuity trust: low interest rates mean lower payouts from the CLAT, higher tax deductions, and more assets left to loved ones.
  2. A retained life estate in a home or a farm: low interest rates produce a higher income tax deduction for donors.
  3. A disclaimer of a donor’s income interest in an existing charitable remainder trust: low interest rates produce a higher income tax deduction for donors.
  4. Charitable gift annuities: lower interest rates produce a higher tax-free payout for donors who do not itemize.

Learn about these gift options to meet your financial and philanthropic goals.

The gist is that time is of the essence for donors who have been considering these types of charitable gifts. It seems unlikely that interest rates will be as low as 1.8% for years to come, perhaps not again in our lifetimes.

For more information about interest rates or to learn more about these gift opportunities, please contact our gift planning team.

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For inquiring minds, the following related articles may be of interest:

TAGS: High interest rates charitable remainder unitrust low interest rates Charitable remainder annuity trusts retained life estates

About the author

Phillip Buchanan

phil.buchanan@duke.edu

Phil is a veteran of development and gift planning who considers it a privilege to help good people celebrate the joy of giving. He served as Duke’s senior philanthropic counsel until his retirement in April 2021 and helped donors, professional advisors and Duke Development officers evaluate the best options for making a charitable gift to Duke. He has been featured in publications such as BusinessWeek  and Kiplinger’s.