Shifting Gears: Rising Inflation and Interest Rates Impact on Charitable Giving

Interest rates are rising, fast.  And it's not just the federal funds target rate. Yields on mid-term Treasuries, which touched historic lows in the early months of the pandemic, have risen several points in just the past few months, to levels we have not seen since before the 2008 crash. Those yields are the benchmark for the so-called “section 7520 rate,” which is the rate of return IRS uses to place a present value on the “income” and remainder interests in a split interest trust or a charitable gift annuity.

As recently as August 2020 the section 7520 rate was at an historic low 0.4 percent, and the chatter among advisors was all about leveraging gift tax values with grantor retained annuity trusts and non-grantor charitable lead annuity trusts. But the rapid rise in the 7520 rate in recent months is unprecedented. Two hundred basis points in just six months, and more likely on the way. And the conversation has flipped.

While a rising 7520 rate increases the present value of a straight income interest or, much less dramatically, a unitrust interest, it sharply reduces the present value of a fixed annuity.  The income tax benefit of setting up a gift annuity is greatly increased, as a higher section 7520 rate assigns more value to the residuum. And the same applies to a charitable remainder annuity trust.

Less obviously, the tax incentives for accelerating the remainder of an existing charitable remainder unitrust, or an existing gift of the remainder in a personal residence or farm, is somewhat strengthened, while the incentive for assigning an existing gift annuity to the issuing charity is somewhat weakened.

Please watch the recording of our webinar about how rising 7520 rates will affect tax incentives for charitable gift planning in coming months, and for some ideas on shifting gears to meet the challenge. ​​​​​Featuring Russ Willis, JD, LLM and Ryan Raffin, CAP.