Featured Article

PG Calc's Featured Article

Key Considerations for Gift Planners in 2009

We recently used this space to share some forward-looking thoughts on what the results of the 2008 election might mean for planned giving. With the election behind us and 2009 around the corner, we’ve been considering a number of factors that may affect donor incentives for making planned gifts in the coming year. We hope our analysis benefits you by providing some context for decisions you may need to make in managing your program.

Consideration 1: Income Tax Rates May Not Change After All
Throughout his campaign, President-elect Obama argued for repeal of the tax cuts enacted during the Bush Administration, coupled with a "middle-class tax cut." The result would be:

An increase in the top income tax bracket from 35% to 39.6% for taxpayers making more than $250,000;
An increase in the tax rate on long term capital gains from 15% to 20%; and
A return to taxing qualified dividends at ordinary income tax rates rather than the current 15%.
A variety of tax credits to taxpayers making less than $250,000.

The tax increases on capital gain income, dividends, and taxpayers who make more than $250,000 in a year will tend to increase the potential tax savings from making gifts to charity, and thereby increase the tax incentives for making planned gifts.

The open question is whether the new Congress and Administration will actually move to enact any of these increases. Without any new legislation, these changes are already scheduled to occur at the end of 2010 when sunset provisions in the current law take effect. President-elect Obama has been non-committal of late when asked whether he intends to push for these tax increases once he is President. There also is no mention of these proposed tax increases in his agenda for the economy that is described on the official Obama-Biden Transition web site, www.change.gov (the "middle-class tax cut" provisions continue to make the grade, however). In the end, the new Administration may very well choose to allow the existing sunset provisions to take their course rather than increase tax rates during a severe recession.

Consideration 2: Estate Tax Rates Most Likely Will Be Extended
Under current law, the federal estate tax will expire at the end of 2009, and then re-emerge at its pre-2001 Act levels in 2011. In this case, the top estate tax bracket would be 55% and the estate tax exemption equivalent would be $1 million from 2011 onward. It is widely assumed, however, that Congress and the Obama Administration will act in 2009 to avoid elimination of the estate tax in 2010. While the Obama-Biden Transition website does not contain a specific federal estate tax proposal, during his campaign the President-elect proposed overturning the scheduled expiration of the federal estate tax in 2010 by extending the 2009 estate tax schedule into 2010 and beyond. This revision would lock in the current top estate tax bracket of 45% and an estate tax exemption equivalent of $3.5 million.

These changes, should they become law in 2009, would leave only the largest 0.3% of estates exposed to federal estate tax. The indefinite extension of the $3.5 million estate tax exemption will eliminate estate tax concerns for thousands of donors, removing relief from these concerns as a motivation for them to make planned gifts. Donors with the potential to fund multi-million dollar gifts, however, will still be interested in techniques for reducing estate taxes, such as the charitable lead trust or charitable remainder trust, as well as bequests and other revocable deferred giving arrangements.

More importantly, the negative effect of removing estates from the estate tax rolls should be substantially outweighed by a long-awaited clarity regarding the estate tax rules for 2010 and beyond. Many potential donors of large charitable gifts have been waiting for the estate tax picture to become clear before committing to a charitable gift large enough to have important estate planning implications. Removing the uncertainty that has surrounded the federal estate tax since the 2001 Act became law will pave the way for these donors to finalize gift plans they may have been considering for years.

Consideration 3: There Will Be a New Mortality Table for Computing Deductions
Section 7520 of the IRS Code created the monthly IRS discount rate used to calculate the charitable deduction for most planned gifts. It also authorizes Treasury to prescribe mortality tables for use in these calculations and further dictates that "such tables shall be revised not less frequently than once each 10 years thereafter." Well, the ten years will be up again on April 30, 2009. The last time this happened, the IRS announced the new mortality table on the last possible day, April 30, 1999, with an effective date of July 1, 1999. We expect a similar story this time around, with the new mortality table announced around April 30, 2009 with an effective date of July 1, 2009.

The new mortality table will be based on 2000 U.S. Census data. The consistent trend in past tables has been a decrease in mortality (that is, an increase in life expectancy) with each subsequent table. We expect that trend to continue. As a result, charitable deductions for planned gifts that will last for one or more lives should decrease modestly under the new table: 5% - 10% for gift annuities (CGAs), charitable remainder annuity trusts (CRATs), and charitable lead annuity trusts (CLATs); 2% - 5% for charitable remainder unitrusts (CRUs) and charitable lead unitrusts (CLUs), retained life estates (RLEs), and pooled income fund gifts (PIFs).

Consideration 4: The Monthly IRS Discount Rate Will Remain Very Low
December's IRS discount rate is 3.4%, near its all-time low of 3.0%. The Federal Reserve Board has been steadily lowering its benchmark interest rates this fall in an effort to loosen extremely tight credit markets. The consensus among Fed watchers is that it will continue to pursue a policy of very low interest rates for months to come as part of its efforts to reinvigorate the economy. We therefore expect that the monthly IRS discount rate will remain at or near historic lows for much or all of 2009. This will translate into continued low charitable deductions for CGAs and CRATs and continued high charitable deductions for RLEs and CLATs. Low IRS discount rates will not be all bad for CGAs, however: low rates will mean a larger proportion of their payments will be tax-free. CRU and CLU deductions are affected very little by fluctuations in the IRS discount rate and PIF deductions are not affected at all.

You should also continue to keep an eye out for CRATs that fail either the 10% deduction test or the 5% probability of exhaustion test. Failure of these tests is most likely when the IRS discount rate is low. What's more, the introduction of a new mortality table in the middle of the year will almost certainly increase the likelihood of a CRAT failing either test. CRUs are also subject to the 10% test, of course, but should be in less peril of failing it since they are affected in only a minor way by very low IRS discount rates. Our Planned Giving Manager and Mini Manager calculations software will continue to warn you whenever you attempt a CRAT or CRU calculation that fails either of these tests.

Consideration 5: ACGA Rates Will Either Stay the Same or Decrease
The American Council on Gift Annuities (ACGA) reviews its suggested maximum gift annuity rates each spring. In light of this fall's economic turmoil, however, the ACGA recently underwent an interim review of these rates, announcing in mid-November that it had concluded that it should not make an interim change to the rates adopted in April 2008 (effective July 1, 2008). In the same announcement, the ACGA indicated that it would be engaging an actuarial firm to help it review its assumptions and methodology for determining its suggested maximum annuity rates. The results of this study will be considered in future recommendations.

It is hard to predict whether the ACGA will change its suggested rates in spring 2009, but if they do change, it seems almost certain that they will decrease. That is what has happened the last five times the ACGA has made a change in its rates. Given the widespread expectation that the current recession will extend well into 2009, it appears likely that economic forces will support a continuation of that trend.

Conclusion
Several developments in 2009 may affect the incentives for making planned gifts. The most dependable is that the mortality table for computing planned gift deductions will be updated in the middle of the year, almost certainly reducing deductions for gifts that last for one or more lives. Almost as certain is that the monthly IRS discount rate will remain very low, favoring CRUs, CLUs, and RLEs over CGAs, CRATs, and CLATs. Tax schedule changes and ACGA rate changes are harder to predict.

All this said, there is reason to be optimistic about gift planning in 2009. While most donors will have concerns about the economy and how their investments have been affected, they will also be interested in gift plans that offer them financial benefits that help alleviate these concerns. A lifetime of fixed payments from a gift annuity backed by the general resources of your organization may be especially attractive to many of your donors these days. Alternatively, a charitable remainder unitrust whose payments have the potential to grow as the economy recovers may have appeal for other supporters. Motivated donors will continue to make planned gifts despite the current economic climate, and in some cases because of it.