Keep in mind that most prospects are motivated to make gifts because they believe in the mission of the charity, not because of the income tax benefits a gift affords. However, once a donor commits to a gift, he or she wants it to be tax efficient. When the IRS Discount Rate goes down, it impacts several different types of planned gifts:
Charitable Gift Annuity: When the discount rate goes down, the income tax charitable deduction also goes down. However, the lower the discount rate, the higher the tax-free return of principal from the gift annuity. For donors who do not itemize deductions, you generally select the lowest discount rate of the last three months to maximize their tax free income. For those who do itemize, you normally select the higher discount rate. When rates are historically low, you non-itemizers benefit. Keep in mind that for younger gift annuitants and those using deferred gift annuities, flexible gift annuities and deferred gift annuities that you may have to lower the payout rate in order to issue a gift annuity, since the minimum remainder required by the regulations may not be met at normal payout rates with a low discount rate.
Charitable Remainder Trusts: As with gift annuities, when the discount rate goes down, the income tax charitable deduction also goes down, making CRATs and CRUTs less attractive, particularly when compared with gift annuities which provide additional tax-free income in a low discount rate environment.
Retained Life Estate: Lower discount rates also lead to higher income tax charitable deductions when a donor makes a gift a real estate while retaining the right to the use of the property under a “retained life estate” arrangement. Right now is a great time to be talking to your loyal donors about the vacation home that they still enjoy but their kids do not want. If they donate the property subject to a retained life estate, they benefit from a significant income tax deduction right now but nothing else really changes until they pass, when the charity takes over the property.
Charitable Lead Trusts: When the discount rate is low, it allows your donors to maximize the amount passed to children, grandchildren or others gift and estate tax free while supporting your charity right away. For the mega-wealthy, using a lead trust together with the $5,000,000 gift tax exemption (which expires in December 2012) allows them to get even more to children or grandchildren without paying any federal transfer tax. If you have not approached your principal gift prospects with this strategy, you NEED to do so right away.
While the low discount rate may make it difficult to offer gift annuities to younger donors and reduce the income tax deduction in a few cases, it also has many benefits which you can use to your advantage.
“Can your organization determine the fair market value of a gift of property for the donor?”
No, the IRS says that establishing the FMV (fair market value) of any gift asset except cash, publicly traded securities or mutual fund shares is the responsibility of the donor, through the services of an independent appraiser.