December 29, 2008
Bad Economy Prompts Change in Gift Annuities
Responding to the changing situation caused by the economy, a key nonprofit umbrella group today recommended that charities lower the amount of money that donors receive in exchange for creating charitable gift annuities.
To create an annuity, donors turn over cash, stock, or other assets to a charity; the charity then invests the assets and makes regular, guaranteed payments to the donor or another person named by the donor until their deaths. After the donors die, the charity keeps the remaining assets in the annuity.
The troubled economy — plus historically low federal interest rates — prompted the American Council on Gift Annuities to urge charities to change the amount that assets in gift annuities are expected to net annually, from 4.75 percent to 4.25 percent. The council also voted to encourage organizations to reduce the upper limit of annuity payments to donors 90 and older, from 10.5 percent of the value of their donated assets to 9.5 percent.
Nonprofit groups are not required to follow the council’s guidelines, but most organizations do.
The council said the change would become effective on February 1. It will lower the amount gift annuities pay to donors because the annuities are required by federal law to conform to an actuarially determined formula. The formula ensures that the annuity is invested in such a way that it can both meet the required payments to donors and have a healthy amount left over for charity at their death.
Frank Minton, a Seattle planned-giving expert who sits on the council’s board, said that, for most people who establish gift annuities, the change in their payments will be moderate. For example, under actuarial calculations, a 75-year-old donor who currently receives $6,700 annually on a $100,000 gift annuity would, with the change, receive $400 to $700 less each year for a new $100,000 annuity. The precise reduction at each age is currently being calculated by the council’s actuary. (The change will not affect gift annuities created before February 1.)
Mr. Minton said the primary reason behind the change is that the economic crisis has reduced the amount charities are able to earn when they invest annuity funds. In this environment, he added, it is necessary to decrease the rates to ensure that a substantial portion of annuities remain for charitable purposes.
The change was also motivated in part by the fact that federal interest rates, which are used to calculate charitable deductions for gift annuities, will drop to historically low levels in January. Under the new interest rates, gift annuities established by single donors under the age of 58 and couples aged 65 or younger would not produce the minimum required charitable deduction. The council’s change will remedy that situation, Mr. Minton said, even if the low interest rates persist for some time.
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Will the ACGA prepare a new revised Uniform Rates Table that will be effective Feb 1, 2009, and if so, how soon will the revised Table be available?
— Gary L Shetler Dec 30, 10:27 AM #
When I came into the industry 25 years ago, pooled-income funds were considerably more attractive than annuities to sophisticated donors under the age of 80. Perhaps this reasonable adjustment will restore some parity between these two excellent life income arrangements.
— Douglas Gortner Dec 30, 11:28 AM #
If the ACGA could determine the new rates in early January, they would help us in marketing to people who are considering CGA’s
— Ben Harrington Dec 30, 11:49 AM #
The Gift Annuity Rates Schedule will be published on the ACGA website no later than January 15. The ACGA actuary is currently developing the schedule.
— Frank D. Minton Dec 30, 11:53 AM #
the drop from 4.75 to 4.25 refers only to the rate of compounding during a deferral period. will these changes also affect immediate annuities?
— r Dec 30, 12:25 PM #
The reduction in the return assumption affects both immediate and deferred gift annuities. Rates for immediate gift annuities will be reduced because of a lower return assumption, and the compounding rate for deferred gift annuities will be 4.25% instead of 4.75%.
— Frank D. Minton Dec 30, 12:35 PM #
will recommended rates for annuitants age 88 and older also be dropped? these are also higher than 9.5 pct.
— r Dec 30, 12:54 PM #
The new rate schedule that the ACGA is recommending caps rates at 9.5%. Rates for ages 82 through 88 will be gradually reduced from those calculated so that they are all less than the 9.5% cap. The short answer is yes, rates for ages 88 and 89 will be lower than 9.5%.
Cam Kelly, Chair, ACGA Rates Committee
— Cam Kelly Dec 30, 05:00 PM #
The ACGA website states that the expected return assumption is being lowered from 5.75% to 5.25%, whereas this article states 4.75% to 4.25%. Which figures are correct?
— Sue Jan 6, 07:23 PM #
Hi Sue: Thanks for your question. You are right: The return assumption is being lowered from 5.75 to 5.25 percent. But ACGA factors in an additional 1 percent to cover the expense of managing the annuity. Therefore, the net expected return is lowered by 1 percent, hence 4.25 percent.
— The Editors, Chronicle of Philanthropy Jan 7, 02:57 PM #
ACGA states that rates are changing from .2 – .7 at each age and going down to 9.5 for ages 90+. I found that at ages 85 – 90 the percentage dropped .8 and .9. Did I understand their explanation correctly or is the spread actually from .2 – 1.0 (including 90+)?
— Tamara Jan 9, 10:49 AM #
The American Council on Gift Annuities has just published information on the new rates, including detailed charts and instructions on calculating annuities, on its Web site at http://www.acga-web.org/2009ratesfeb/ratesfeb09.html
— The Editors, Chronicle of Philanthropy Jan 9, 11:22 AM #
What are the underlying return assumptions for equities, the 10-yr Treasury and cash that produced the 5.25% gross return?
— Bob Rock Jan 22, 09:24 AM #