Following its annual conference held in Cincinnati last October, the National Committee on Planned Giving (NCPG) released the proposed Valuation Standards for Charitable Planned Gifts. The stan­dards represent the results of three years of work by a task force comprised of representatives of the gift planning community. For a complete list of the NCPG Valuation Standards Task Force, see below.

The project began in the fall of 2000 in response to the perceived need for guidelines on the best ways to determine the economic value of charitable remainder trusts, gift annuities, and other split-interest charitable gifts to the ultimate charitable recipient.

The Council for Advancement and Support of Education (CASE) has for a number of years pro­mulgated standards for the types of gifts that should be counted toward capital campaign goals in higher education. The NCPG standards, on the other hand, do not address the threshold issue of whether a par­ticular gift should be credited to a campaign or other ongoing fund development efforts, but are designed to instead help determine the value of the gift once the nonprofit recipient has decided to count it.

Why not use the charitable deduction?

Over the years since the Tax Reform Act of 1969 first introduced strict guidelines for deter­mining the charitable income, gift, and estate tax deductions for trusts and other split-interest gifts, a number of programs have adopted the charitable deduction amount as a surrogate for the value of the charity’s remainder interest in the gift. In recent years, however, the charitable deduction has become a less reliable measure as Congress introduced changes that caused the charitable deduction to be tied to interest rates on relatively short-term federal government debt obligations.

Note, for example, how fluctuations in the federal midterm funds rate over a five-year period can alter the charitable deduction for a $1 million, 6% charitable remainder annuity trust for the life of a 72-year-old donor:

It is difficult to justify these different valua­tions when such trusts are rarely invested solely in midterm treasury obligations. The NCPG Valuation Standards are designed to help chari­ties determine what funds are likely to be avail­able at the termination of a gift by employing prudent investment rule standards and then discounting that amount back to present value using the time value of money as represented by inflation.

For example, in the case of the annuity trust described above, the NCPG standards arrive at what many would consider a more realistic value for the trust. Assuming an asset allocation of 60% equities and 40% fixed income, using the 70-year average equity returns and the current 10-year federal funds rate for the fixed income por­tion, the net return on the trust described above would be 7%. If the trust pays 6% and earns 7%, at the end of the donor’s 15-year life expectancy the remainder of the trust should be worth approximately $1,225,000. If this amount is discounted to present value using the long-term historic average inflation rate of 3.4% to account for lost purchasing power, the remainder interest in the trust has a present value of $742,000. Note that this figure is significantly different from the charitable deduction amount, which would fluctuate as illustrated above from $449,000 to $570,000 during a recent five-year period.

Experienced gift planners know that in the case of charitable gift annuities, the chari­table deduction is normally in the range of 30% to 40% of the amount used to establish the gift annuity. In reality, many institutions report average actual residuum amounts of 75% or more. A more thoughtful approach to valuing the gift from the charity’s perspec­tive, in lieu of an outmoded method of relying on the charitable deduction, will cause chari­table gifts to be evaluated more fairly and accurately.

The proposed standards feature helpful explanations of methodology and numerous examples of how the recommendations are applied in practice. To review the proposed standards, visit www.ncpg.org. An in-depth examination of the standards will be featured in Sharpe’s Strategic Gift Planning 2004 seminar, to be held in New York on January 12 and 13 and Chicago on February 19 and 20. See page 3 or visit www.sharpenet.com/training for details of this and other upcom­ing Sharpe seminars.

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