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ACGA Gift Annuity Rates Effective July 1, 2009

MSK Client Alert
June 2008

The American Council on Gift Annuities ("ACGA") has announced that effective July 1, 2008, the gift annuity rates for both immediate gift annuities and deferred-payment gift annuities will be reduced in light of the significant changes in interest rates experienced in the past year. Unless unforeseen circumstances should necessitate an interim adjustment, these rates will remain in effect at least through June 30, 2009. 

Since gift annuities provide a charitable element, the ACGA rates are not intended to be competitive with insurance company rates. Thus, depending on the donor’s age and sex, the differential between the ACGA rates and the commercial rates varies between 77.8% and 52.3%. The reason for this deferential, which has remained historically consistent, is the conservative assumptions underlying the ACGA rates, which are as follows: 

  1. The residuum realized by the charity upon termination of an annuity is 50% of the original value of the gift annuity. In other words, after all annuity payments are made, 50% of the original gift is to remain for the charity.
  2. Life expectancies are based on the 2000 Annuity Mortality Tables for female lives with a two-year setback in ages (i.e., annuitants are expected to live two years longer than the average life expectancy). The rates also incorporate protections for increasing life expectancies, thereby making the rates even more conservative.
  3. Annual expenses for investment and administration are 1% (i.e., 100 basis points) of the fair market value of the gift annuity reserve.
  4. The total annual return on gift annuity reserves is 5.75% (4.75% for deferred annuities). This return is based on an asset allocation of (i) 40% equities, using a 9% return; (ii) 55% 10-year Treasury bonds, using a 3.81% return; and (iii) 5% cash and cash equivalents, using a 2.42% return. Although the benchmark for this asset allocation is 5.814%, it has been rounded down to the nearest .25 percent market, resulting in the more conservative 5.75% return assumption.
  5. Annual payments are made in semiannual installments at the end of each period.
  6. The rates for the youngest and oldest ages are somewhat lower than the rates that would follow from the first four assumptions.

As demonstrative by the conservative assumptions underlying the ACGA rates, the ACGA rates are designed to minimize financial risk to the charities that issue annuities and donors.* A charity that follows the ACGA rates will rarely lose money on a gift annuity, even if the annuitant exceeds his or her life expectancy and investment performance is mediocre. It is therefore prudent for charities NOT to exceed the recommended maximum rates. In addition, given the current market conditions, charities should consider using the new rates as soon as possible and should not rush to create annuities using the higher rates prior to July 1, 2008. 

The ACGA rates have been the industry standard since the ACGA began publishing the rates in 1927, and this standard has proven to be extremely valuable. Such a standard relieves charities of the expense of developing their own rates, enables charities to minimize their risk and more easily meet state regulatory requirements, and prevents charities from competing with one another, thereby encouraging donors to view a gift annuity as a philanthropic instrument rather than just another investment vehicle. Charities should exercise extreme caution when deciding not to use the ACGA rates. 

[1] This article is an overview of the American Council on Gift Annuities’ April 2008 "Explanation of the ACGA Gift Annuity Rates Effective July 1, 2008." 

* After all, unlike a charitable remainder trust, in which the income beneficiary looks only to the assets of the CRT to satisfy the distribution requirement, the full financial net worth of a charity stands behind the annuities it issues.


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