Low interest rates are often seen as a good thing – a lower interest rate can mean a lower cost to obtain a mortgage, to finance a car, or to finance an education. There is, however, a downside to low interest rates for those who depend for living expenses on interest payments from money market accounts, from certificates of deposit, from Treasuries, and from other fixed income investments. In a low interest rate environment, it can be difficult to find safe fixed income investments that generate desired income levels, especially when CDs and Treasuries may be maturing and higher rates of return are no longer available. Charitable gift annuities can help address this problem.
A charitable gift annuity is a relatively simple contract that pays a donor a reliable annual income in exchange for a gift, and can present an opportunity to increase an income from 2% or 3% to 6%, 7%, and even 9% for those 85 years and older. In a low interest rate environment, these types of gifts can be an ideal way of increasing, or at least maintaining, an income while making a gift to support the Law School.
Charitable lead trusts also become more attractive in low interest rate environments because they present a chance to transfer assets to children and to grandchildren at a reduced transfer tax cost. The Applicable Federal Rate (AFR), which is 120% of the average of Treasury mid-term obligations, is used to determine the present value of assets conveyed to heirs from lead trusts. The value of the assets going to heirs is measured when the trust is established, so when the AFR is low there is the opportunity to pass assets downstream at a reduced tax cost.
Please explore these opportunities on our website, and let us know if you would like additional information.