The applicable federal rate (AFR), also known as the IRS Section 7520 discount rate, reached a historic low of 0.6% for June 2020. A lower AFR results in a lower charitable deduction for charitable remainder trust and charitable gift annuity (CGA) donors, so deductions for these kinds of gifts are at an all-time low. Deductions for gifts that pay a fixed amount, such as a CGA, rather than a unitrust amount, are especially affected. When combined with the reduction in the American Council on Gift Annuities' suggested maximum rates effective as of July 1, this news may appear to signal that CGAs will be less attractive to some potential donors. What is the appeal of funding a charitable gift annuity right now?
Charitable gift annuities provide donors with an opportunity to support their charities of choice in exchange for a stream of payments over their lifetime. Having a source of reliable income can be especially appealing during times of economic uncertainty, such as the environment we are in right now. CGAs can also be useful for income tax planning by reducing and deferring capital gains tax or reducing taxable income. For example, a donor could use appreciated securities to fund a CGA that will make payments to her for life. In return, the donor’s tax benefits would include an income tax charitable deduction, reduced capital gains spread over the donor’s life expectancy and annuity payments that are partially tax-free income during the donor’s life expectancy.