Taking the “Ouch” Out of Low Interest Rates

by Roger Ellison, CFP

[Beware, the CGA rates discussed in this article may be out-of-date.]

Low and declining interest rates have never been so evident as recently when someone faces the renewal of a CD. For those on fixed incomes, particularly when a sizeable part comes from interest sensitive investments like certificates of deposits, the effect has been felt somewhat painfully. Ouch! Just like getting a finger caught in a door, a hand against a stove burner, or getting pinched by pesky brother, it hurts.

For those who are charitably inclined, many churches and charities offer a very simple gift arrangement called a charitable gift annuity. A charitable gift annuity is a simple contract between the donor and the charity. In exchange for an irrevocable gift of cash, securities, or other assets, the charity agrees to pay one or two annuitants a fixed sum each year for life. The older the annuitants are at the time of the gift, the greater the fixed income the charity can agree to pay. Almost all charities voluntarily use rates that are established by the American Council on Gift Annuities. Using those rates as an example, the payout for a 75 year old would be 7.9% for life, 80 year old, 8.9%, 90 year old, 12%; a couple 75 and 75, 7.0%, 85 and 80, 8.1%. In most cases, part of each payment is tax-free, increasing each payment's after-tax value. Payments are usually made quarterly, though bi-annual or annual options are sometimes offered. Minimum gifts vary from charity to charity, though $5,000 is fairly common.

For some people, who already have plans to remember one or more charity in their wills, these gifts can be much better than waiting until after death to make the gift through a bequest. By making the gift now through a gift annuity, a person can experience the real joy of making a sizeable gift, may reduce their estate taxes or probate costs, and will be assured of a high and stable income for the rest of life. And, because each gift is considered by law to be partly gift and partly an investment in contract, a nice charitable income tax deduction results, which may lower income taxes.

Are gift annuities advisable in all situations? No! Do all charities offer them? No. Are these gifts safe? Yes, but only if the donor knows the charity well should such a gift even be considered. Deal only with representatives of charities that are well known to you. Stockbrokers, life insurance agents and others offer a variety of annuities and other investments. However, it is not advisable to try to complete a charitable gift annuity through any other than direct contact with a charity.

If your interest rates are low, now is an excellent time to consider how a charity might help you take the “ouch” out of these very low interest rates.

Roger Ellison, Vice President of Planned Giving at the West Texas Rehabilitation Center Foundation, is a Certified Financial Planner who provides gift and estate planning services on a no cost, no obligation basis. He may be reached at 325-223-6309 or roger@rogerellison.com