We’ve been hearing quite a bit about the Federal Reserve system (“the Fed”) likely cutting the Fed Funds rate – the key interest rate that it controls – at its next Open Market Committee meeting, which is September 17-18. The Fed aggressively hiked the Fed Funds rate from February 2022 to August 2023 in a determined effort to bring down inflation, which peaked at over 9% in 2022. It has kept the Fed Funds rate at the same relatively high level for the past year. Lately, however, there have been various reports showing that the economy is showing signs of slowing down, and inflation in recent months has approached the Fed’s 2% target. This has led the Fed to signal it is finally comfortable with reducing interest rates.

When the Fed cuts the Fed Funds rate, other interest rates tend to follow suit – especially short-term and medium-term interest rates. Even long-term interest rates, such as mortgage rates, are eventually affected. And that brings us to the topic of charitable gift annuities (CGAs). We’ve been receiving calls over the past few weeks from gift officers questioning if, how, and when the declining interest rates in the economy will affect CGAs. Our client organizations are asking, should they be promoting gift annuities at current rates – so donors can “get in” before an overall reduction in payout rates?

That’s a great question and something worth talking about.

It is no secret that the American Council on Gift Annuities (ACGA) recently increased its suggested maximum annuity rates. The new rates, which went into effect on January 1 of this year, marked the third increase in the ACGA rates in the last 18 months. At typical annuitant ages, the current rates are roughly 1.5% higher than they were in June 2022. For example, the ACGA rate for a 75-year-old annuitant was 5.4% in June 2022 and is 7.0% today.

The larger story is that today’s ACGA rates are the highest they’ve been in 15 years. What does all this mean for gift annuities?

In February, the IRS discount rate was 1.6%. In December, it is up to 5.2%, more than triple what it was just ten months ago. This dramatic change coincides with a similar escalation of interest rates in the U.S. generally, as well as increased nervousness over whether the rapid rise in interest rates might soon tip the economy into a recession.

Don’t freak out over the swift shift in economic conditions. View it as an opportunity. This is a great time to renew contact with your donors and educate them about gift plans they might want to consider in this new economic reality.

The combination of extremely low monthly IRS discount rates, a stock market at or near record highs, and the possibility of increased estate taxation before the year is over creates ideal conditions for turning lead trust prospects into lead trust donors. Take advantage of the moment! Completing even a handful of lead trusts could make a big difference to the finances of your organization.

Non-grantor lead trusts offer wealthy individuals the opportunity to pass assets to their heirs at substantial tax savings while providing immediate benefits to one or more charities they care about. Grantor lead trusts offer a wider range of donors a tax-efficient way to fulfill multi-year pledges or to offset an income windfall while fulfilling their charitable wishes.