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American Council on Gift Annuities (ACGA) Rates for 2012

The ACGA Board of Directors announced updated gift annuity rates effective on January 1, 2012. The new rates for senior annuitants will be 0.5% to 0.8% lower than the 2011 ACGA schedule.

The primary factor in reducing the rates is a lower yield on the ten-year Treasury bond. During 2011, the Treasury bond yield changed from 3.3% in January to below 2.0% in October. With the ongoing issues over the Euro, there is a continued cash "flight to safety" of Treasury bonds. This may lead to even lower Treasury bond yields during 2012.

Because the ACGA gift annuity reserve portfolio assumes 40% equities, 55% bonds or fixed income and 5% cash, a reduction in bond yields changes the total assumed return. The 2012 assumed return will be 4.25% with a 1% load, for a net return of 3.25%.

The new rates will pass the Sec. 514(c)(5) minimum 10% charitable deduction test. The target minimum deduction is at least 20%. Rates above age 80 are adjusted lower than the actuarial formula to provide a greater margin of safety.

Gift Annuities Marketing with Low CD Rates

In 2012 gift planners will often ask the question – "How can I increase my number of closed gift annuities this year?" First, it is helpful to consider the goals of your typical donors.

Most donors have a goal to receive certificate of deposit (CD) payouts of 3% to 4%. As recently as 2007, a one-year CD had a payout rate of 3.8%. Your typical donor might comment, "If I could just reach a payout of 3% to 4%, I would be very happy."

However, as interest rates have declined the past two years, CD rates have also been reduced. According to www.monitorbankrates.com, the following average CD rates are applicable in December of 2011.

CD Duration	CD Payout Percentage
One Year	0.43%
Two Years	0.69%
Five Years	1.42%

The One-Third CGA and Two-Thirds CDs Plan

An excellent solution that will help many donors achieve their overall return objectives is to transfer one-third of their CDs into a charitable gift annuity. The gift annuity provides a much higher payout than the current CD rate. In addition, the gift annuity produces a charitable tax deduction and savings in the year it is created and partly tax-free payments for one or two lives.

Why not transfer all your CDs to a gift annuity? Most donors will need to retain approximately two-thirds of their CDs to have a sufficient liquidity reserve. While financial planners will suggest an amount that depends upon other assets such as a home, stocks, bonds and qualified plans, a general reference number used by many financial planners is a reserve of around $250,000.

This reserve is generally sufficient to cover the three levels of potential care for most seniors. Home health care is quite often an expenditure of around $15,000 to $20,000 per year. Assisted living in most parts of the country is available for $45,000 to $65,000 per year. Finally, full nursing care will range from $80,000 to $100,000 per year.

These numbers are general ranges and will vary depending upon whether your location is urban, suburban or rural. However, it is helpful to understand that a reserve of $250,000, plus other resources such as home and retirement plan, should be sufficient. If your donor has questions or would like to obtain further counsel, then a gift planner should refer him or her to an elder law attorney, CPA, CFP, trust officer or other qualified professional advisor.

With a set aside of sufficient funds for the "rainy day" protection amount, many donors will be quite comfortable transferring one-third of their CDs into charitable gift annuities.

Mary Green Desires High Fixed Payments

Mary Green is age eighty and a surviving spouse. She and her late husband George were financially careful and accumulated substantial assets. Mary has $300,000 in certificates of deposit, owns her home with value of $250,000 and has an IRA of $200,000. She also receives Social Security and a small pension.

Mary has invested in two-year CDs and is receiving a 0.69% return. She would like to receive higher payments, but with the uncertainty in the economy she is reluctant to extend her CD maturity past two years.

A solution for Mary is to transfer $100,000 of the CDs to a charitable gift annuity. In 2012, a person age 80 may receive a 6.8% charitable gift annuity. Mary retains $200,000 of the CDs and receives the 0.69% return.

Category	Amount	Return	Payout
CDs	$200,000	0.69%	$1,380
Gift Annuity	$100,000	6.8%	$6,800
Total			$8,180

With her one-third CGA and two-thirds CD plan, Mary receives $1,380 from CDs and $6,800 from the gift annuity. Her $8,180 is an average return of 2.72% on the total $300,000 investment. This is not quite her desired 3% to 4% amount, but it is a huge improvement over the CD return.

Mary Green Considers the Effective Return

With her IRA required minimum distribution, Social Security payments and pension, Mary is in the 25% tax bracket. In addition to receiving the 6.8% payout with the gift annuity, she also benefits from a charitable deduction and partly tax-free return. These two tax benefits produce the effect of a higher payout from the gift annuity. Mary would have to have a payout substantially above 6.8% from a certificate of deposit to end up with the same after-tax-benefit she enjoys with a gift annuity.

With Mary's age of 80 and her selected payout rate, she receives a charitable deduction of $47,911. In her 25% tax bracket, this saves $11,978. While this is a cash contribution and limited to 50% of adjusted gross income, she can take most of the deduction this year and the balance next year. She has a potential total of five carry-forward years for the deduction, but probably will use it all in two years.

In addition, Mary receives $6,800 per year. However, $5,542 of the fixed payout is tax-free. Because there is no 25% tax on this amount, this is like receiving a higher payout amount.

Consider the benefit to Mary with the two tax savings. She receives 6.8% plus two tax benefits. Therefore, she is "effectively" receiving a higher return rate.

Category	Amount	Effective Return	Payment Amount
CDs	$200,000	0.69%	$ 1,380
Gift Annuity	$100,000	9.8%	$ 9,800
Total			$11,180

With her CD payment of $1,380 and a 9.8% effective payment (6.8% plus the two tax benefits equal $9,800), Mary's total effective return from the gift annuity is $11,180. This amount divided by $300,000 produces a combined return of 3.72%.

Mary Likes the One-Third CGA and Two-Thirds CD Plan

Mary Green is very pleased with this part CD and part gift annuity plan. She responds, "I don't follow all the math, but I do know three things. I receive $6,800 each year for my lifetime. There is a very large deduction now and I will enjoy partly tax-free payments for life. Finally, when I pass away there will be a substantial gift to my favorite charity."