Making gifts during an economic downturn

By williamwagner

Tax Facts | National Underwriter Company


For some, making gifts during an economic downturn is simply not possible or desirable. For others, it may represent an opportunity. The opportunity may lie in the reduced value of property that can be given or the lower Section 7520 interest rates used to discount certain gifts. But some gifts make more sense than others during an economic downturn.

How can there be an advantage to lower values for property?

In general, the value of a gift is the fair market value of the property given. A lower value for the property makes it more likely that a gift will be protected by the gift tax annual exclusion ($13,000 in 2009, effectively $26,000 for married couples), the gift tax unified credit applicable exclusion amount ($1,000,000 in 2009), or the generation-skipping transfer tax exemption ($3,500,000 in 2009), and will result in a lower taxable gift. It generally helps if the property then recovers lost value or appreciates after the transfer. Of course, a lower value is generally not desirable for purposes of the income tax charitable deduction.

Should gifts be made of loss property?

Property that would result in a loss if sold (tax basis is in excess of the price for which the property could be sold) should generally not be given away. A donee takes a carryover basis and would not be able to take the loss for income tax purposes. The donor should consider selling the property, taking the deduction for a loss, and giving the sales proceeds to the donee.

What is the effect of lower Section 7520 interest rates on transfers to trust?

Income interests, annuity interests and remainder interests in trust are valued using actuarial tables and an interest rate that changes monthly. High or low interest rates favor certain types of trusts over others. The currently lower IRC Section 7520 interest rates (2.6 percent in April 2009) favor transfers using charitable lead trusts (CLATs) and grantor retained annuity trusts (GRATs). The lower Section 7520 rate produces a higher value for the annuity interest and a lower value for the remainder interest in a CLAT or a GRAT.

Example: Grantor transfers $100,000 to a CLAT. The CLAT pays a $10,000 annuity to charity for 10 years at the end of each year, with remainder to child. Here are the results at different interest rates.

Section 7520 Rate
Annuity Value
Remainder Value
2%
$89,826
$10,174
4%
$81,109
$18,891
6%
$73,601
$26,399

As can be seen, the lower the interest rate is, the lower is the value of the remainder interest (the value of the gift to the child) following an annuity interest. Correspondingly, in the case of a CLAT, the lower the interest rate is, the higher is the value of the annuity and the amount of the charitable deduction.

On the other hand, the lower the interest rate is, the higher is the value of the remainder interest following an income (or use) interest. Thus, personal residence trusts (PRTs) and qualified personal residence trusts (QPRTs) are adversely affected by lower interest rates.

Interest rates have very little effect on unitrusts such as a charitable remainder unitrust (CRUT). Unitrusts are variable annuities with payments that increase or decrease depending on the annual valuation of trust assets. For valuation purposes, the unitrust payout rate may be slightly adjusted for interest based on when the first payment is received and the frequency of payments.

How are charitable gift annuities affected by the current economic environment?

Obviously, charitable giving may be more difficult to do in poor economic times. Beyond the obvious, charitable gift annuities are affected in a couple of ways.

First, the lower Section 7520 interest rates adversely affect the amount of the charitable deduction. In this regard, a charitable gift annuity is similar to a charitable remainder annuity trust (CRAT). The lower the interest rate is, the lower is the value of the remainder interest (the value of the gift to charity and the charitable deduction) following an annuity interest.

Second, in response to the economic downturn, the suggested gift annuity rates recommended by the American Council on Gift Annuities and used by many charities have been lowered. This means lower payouts to purchasers of charitable gift annuities. The table below shows the rates in April 2009 (effective February 2009 through June 2009) and the rates from one year earlier.

Single Life Rates At Selected Ages
Single Life Rates At Selected Ages
Age
In April 2008
In April 2009
0
3.7%
2.6%
10
3.9%
2.7%
20
4.0%
2.9%
30
4.3%
3.2%
40
4.7%
3.7%
50
5.3%
4.4%
60
5.7%
5.0%
70
6.5%
5.7%
80
8.0%
7.1%
90
11.3%
9.5%


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