PG Calc Featured Articles

We frequently hear about so-called “underwater gift annuities” from our clients. We’re talking about those charitable gift annuities (CGAs) that were established many years ago – by donors with the best of intentions – but for which, over the years, the annuity payments have used up all the gift principal. The annuitant (who is frequently the donor) has probably lived well past his or her original life expectancy, but the sponsoring charity is still obligated to continue making annuity payments for as long as the annuitant is still alive. In case there is any question, there is absolutely zero chance of the charity ever receiving any residuum from that gift. And rest assured, this is not an unusual occurrence. We hear this same sad story again and again.

How did this happen? How did we end up in these unpleasant circumstances? And more specifically, what is to be done now? How does the sponsoring charity manage the situation going forward? And does the charity have any options at this point?

In times of uncertainty, donors may be inclined to reconsider, postpone, or even suspend their charitable giving. From the donor’s perspective, this is a rational and reasonable reaction because charitable giving is optional and voluntary. However, charitable giving also becomes even more crucial during these times as the demands on charitable organizations increase.

Successful charitable organizations will chart a course to maintain donor relationships through this period of uncertainty, even when donors delay or suspend their giving. We believe planned giving, especially revocable testamentary gifts, can provide an avenue to maintain and even expand donor engagement during these difficult times.

The Internal Revenue Service defines a private letter ruling, or PLR, as a statement issued to a taxpayer that interprets and applies tax laws to the taxpayer's specific set of facts. A PLR is issued to establish with certainty the federal tax consequences of the applicant’s tax question, and the findings are binding on the IRS. The resolution of the tax question in the requested PLR may not be relied on by other taxpayers. The PLRs are generally made public after the taxpayer’s identifying information has been removed from the document.

PLRs are important to planned giving to understand innovative gift planning opportunities. Although the PLRs are not binding on other taxpayers, donors and their advisors have a better understanding of how the IRS would rule when presented with a case with the same facts. While other donors may not rely on private letter rulings, certain unique planned giving options are now more common based on the PLR outcomes, such as flexible and step gift annuities, reinsured charitable gift annuities, commuted payment gift annuities, and more.

Last year at this time, we were talking about how well traditional investment portfolios had done in 2023. After a truly disastrous performance in 2022, the stock market came roaring back in 2023, and the bond side held its own. Long-term performance averages seemed reliable again, and investors regained their confidence. So how did traditional investment portfolios do in 2024? As it turns out, they did quite well. Roughly speaking, the investment performance for traditional investment portfolios in 2024 was a repeat of the robust performance in 2023. Let’s take a look at some of the details.

You’re preparing an illustration, or maybe a marketing piece, and want to show the potential tax savings – both income and capital gains – from a planned gift. You’ll need to make several assumptions including the gift amount, ages, and tax rates. For the first two, gift amount and ages, you can be guided by what you know about your prospect or, for a marketing piece, your intended target market. But how are you going to select the tax rates?

It’s certainly appealing to show the largest possible tax savings, which argues in favor of using the highest possible tax rates: 37% for income tax and 20% for capital gains. (And you might even choose 40.8% for the income tax rate, because it’s conceivable that the 3.8% Net Income Investment Tax Surcharge might apply.)

Here’s the rub: very few taxpayers fall into the 37% tax bracket. Even fewer also fall into the 20% capital gains bracket. 

With the … let’s just call it “excitement”  … of the 2024 election now in the rearview mirror, it’s time to consider what comes next. Political swings are often accompanied by uncertainty, sometimes even chaos. Charitable giving is voluntary behavior, and in the face of uncertainty and chaos the rational choice is to postpone voluntary decisions like whether to make a charitable gift. The savvy planned giving officer will pivot to reinforce the reasons for giving. As tempting as it is to fret over politics, tax policy, the economy, and the stock market, we really have no control over these factors. Instead, this is an opportunity to focus on the mission, explain the community's needs have not changed, and help our donors understand the difference they can make with their next charitable contribution.

Still, it is worthwhile to review the impact of past changes in the balance of political power on overall charitable giving. 

The Qualified Charitable Distribution (“QCD”) from traditional IRAs is not new; it has been around since 2007. The Tax Act of 2006 ushered in this unique provision that allows distributions from traditional IRAs made directly to charities to escape the normal income tax on money taken out of a retirement plan. The donor is allowed to exclude the amount of the QCD from taxable income, but the offset is that there is no charitable income tax deduction for the gift being made to charity.

There has been confusion about the QCD ever since 2007, because it deals with aspects of IRAs that many are unfamiliar with. The biggest area of confusion has been distinguishing the RMD for a traditional IRA from a QCD. They are not the same thing. Not at all. And it is dangerous to confuse the two.

As they reshape philanthropy, the Millennial and Gen Z generations are prioritizing social impact, embracing technology, and seeking innovative ways to engage in their giving. A report, Shaping Tomorrow: How Gen Z and Millennials View Charitable Giving, based upon a survey conducted by Foundation Source, offers new insights.

These generations proactively seek opportunities to give back through a wide range of charitable activities based upon values and attitudes shaped by the tumultuous years during which they grew up. They are determined to play a role in communities they care about, believe they have an obligation to make an impact, and are ready to get to work!

We’ve been hearing quite a bit about the Federal Reserve system (“the Fed”) likely cutting the Fed Funds rate – the key interest rate that it controls – at its next Open Market Committee meeting, which is September 17-18. The Fed aggressively hiked the Fed Funds rate from February 2022 to August 2023 in a determined effort to bring down inflation, which peaked at over 9% in 2022. It has kept the Fed Funds rate at the same relatively high level for the past year. Lately, however, there have been various reports showing that the economy is showing signs of slowing down, and inflation in recent months has approached the Fed’s 2% target. This has led the Fed to signal it is finally comfortable with reducing interest rates.

When the Fed cuts the Fed Funds rate, other interest rates tend to follow suit – especially short-term and medium-term interest rates. Even long-term interest rates, such as mortgage rates, are eventually affected. And that brings us to the topic of charitable gift annuities (CGAs). We’ve been receiving calls over the past few weeks from gift officers questioning if, how, and when the declining interest rates in the economy will affect CGAs. Our client organizations are asking, should they be promoting gift annuities at current rates – so donors can “get in” before an overall reduction in payout rates?

That’s a great question and something worth talking about.

Here we are some 20 months after the passage of the Legacy IRA Act, and questions remain. That law updated Section 408(d)(8) of the Internal Revenue Code to allow Qualified Charitable Distributions (QCD) from IRAs to fund charitable gift annuities and charitable remainder trusts. After all this time, there remains some ambiguity.