Gift Plan Details

Nothing, in terms of a charitable gift to your organization. Individuals with a will own their property during lifetime; their will directs how that property is to be administered and distributed after death. A revocable trust takes title to property during lifetime, but distributes it similarly to a will after death.

Any major gift, made in lifetime or at death, as part of a donor’s overall financial and/or estate planning. By contrast, gifts to the annual fund or for membership dues are made from a donor’s discretionary income, and while they may be budgeted for, they are not planned.

(Our handy Planned Giving Pocket Guide describes all planned gifts.)

• First, outright gifts that use appreciated assets as a substitute for cash;
• Second, gifts that return income or other financial benefits to the donor in return for the contribution;
• Third, gifts payable upon the donor’s death.

They can use cash, securities (stock, bonds, mutual fund shares) or real estate. They can give tangible personal property (artwork, books, artifacts, equipment, etc.) They can fund a gift plan with a business or partnership interest (closely held stock, a share in a professional corporation, an investment in a limited partnership). They can give you a paid-up life insurance policy. A donor can also direct a charitable distribution from the balance remaining in their retirement plan (IRA, 401(k), Keough, etc.) at death. They can also make your organization the owner and beneficiary of a new life insurance policy.

Note: Some gift assets can prove challenging for a non-profit to administer and/or liquidate, and your organization should review offers of non-traditional assets carefully before accepting them.

I have always dealt with stock gifts as a planned giving professional — mainly because it needed a little legal expertise — valuation can be tricky, transfers sometimes are tricky, forms can be tricky, figuring out who are the donors can be tricky. So, it often falls to the planned giving people to deal with but really, this is just a matter of opinion Our assumption is that if there are no planned giving people at a nonprofit, then someone in finance will handle. 

“Or is this dependent on context?” Yes, depends on how the charity has been handling and whether they have inhouse planned giving people or not. If the latter, in what context are gifts of stock considered planned gifts, and when are they not? Obviously, any stock that is donated to fund a planned gift (like a CGA) is a planned gift. Regular stock gifts can go either way — there is no law or hard rule.

The donor makes an irrevocable gift, but with your agreement they retain the right to receive income payments in return, usually for lifetime. Depending on the gift plan chosen, income can be paid to the donor and/or to family members or other individuals. Donors receive an income tax charitable deduction for the fair market value of their gift, minus the present value of the income interest they have retained (calculated as a function of the gift’s payment rate and how long payments are expected to be made to the beneficiaries).

It depends on the asset used to fund the gift, whether the gift was made during the donor’s lifetime or at death, and whether the donor retained an income interest from the gift. Here are the guidelines:

• Outright, lifetime gifts of cash,publicly traded securities,or other property held by the donor for more than 1 year (“long-term capital gain property”), are deductible at fair market value.
• The charitable deduction for a gift that returns income to the donor and/or other beneficiaries, such as a charitable gift annuity or a charitable remainder trust, is the fair market value of the gift asset minus the present value of the income interest retained.
• Revocable gifts that will be paid to your organization upon the death of the donor do not generate an income tax deduction. Therefore, donors do not receive a deduction for including a charitable bequest when they write their will, for naming you the beneficiary of a life insurance policy, or for designating your organization to receive the remaining balance of their retirement plan.

*Property of any kind that the donor has held for less than 1 year is considered short-term capital gain (or “ordinary income”) property by the IRS, and its value for deduction purposes is limited to the donor’s adjusted cost basis.

If your organization can use the property to further your tax-exempt functions (also known as putting it to a “related use”), the deduction is the fair market value of the asset. However, if you cannot use the property, or if the donor instructs you to liquidate it and use the cash proceeds, the deduction will be limited to the donor’s cost basis in the asset.

Note: The broader your organization’s charitable functions, the more “related uses” can be found for gifts of personal property. A college, a library, a museum and a hospital, for instance, could all put a painting to good use, even if it wasn’t the same use. Nonprofits with more narrowly focused missions, on the other hand, may be hard-pressed to find a use for a proposed gift of personal property.

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, “qualified” appraiser.

Except for publicly traded securities, gifts of property worth $5,000 or more held by donors longer than 1 year must be appraised in order to establish their fair market value (and thus the charitable deduction donors may claim for the donation). Appraisals must be obtained by the donors and not the recipient charity, and must also be obtained specifically for the purpose of substantiating the claimed deduction (in other words, insurance appraisals are not acceptable). Donors are required to get their appraisal not earlier than 60 days before they make their gift, and not later than the due date, with extensions actually taken, for the tax return on which they are first claiming their deduction.

Closely!  Donors must file IRS Form 8283 (“Noncash Charitable Contributions”) if the amount of the total charitable deduction they are claiming for all noncash gifts is more than $500 for the year. If one item of donated property, or a group of similar items, exceeds $5,000 in claimed value (unless the property is publicly traded securities), donors must also summarize on Form 8283 the appraisal they obtained on that property. The appraiser and a representative of your organization must also sign that appraisal summary.

If, within 3 years of the date of the gift, your organization sells or disposes of donated property for which the donor claimed a deduction of $5,000 or more (except for publicly traded securities), you must file a separate report to the IRS, Form 8282 (“Donee Information Return”). You state the donor’s name, identify the property, and tell when you received the property, when you disposed of it, and what proceeds, if any, you received on the disposition.

You can download Form 8283, its Instructions, and Form 8282 plus Instructions here.

Caution: The requirements that the IRS places on donors to substantiate charitable deductions for property gifts are complicated – we’ve just given you a summary here – and there are penalties for non-compliance. As your nonprofit’s representative, be careful about providing any advice to donors about compliance, and urge them to consult with their own advisors before making a property gift.

The donor includes a provision in their will directing that a gift be paid to your organization after their death or the death of one of their survivors. The donor faces two sets of choices when they write a charitable bequest:

• They can give your organization either a specific amount of money or item of property (a “specific” bequest), or they can give a percentage of the balance remaining in their estate after taxes, expenses, and specific bequests have been paid (a “residual” bequest).

They can direct you to use their bequest for a particular program or activity at your organization (a “restricted” bequest), or allow you to use it at your discretion (an “unrestricted” bequest).A donor might direct that a bequest be paid to you if one of their heirs does not survive (a “contingent” bequest).

Generally, individuals are cautious when they specify an amount of money that is to be paid in the future by their will. In many cases, however, their estates are larger than they anticipated, making a percentage of the residue a better gift for your organization than a specific, dollar-amount bequest.

Suggest a codicil, a document that adds a bequest to your organization, then confirms all other provisions of the existing will. It’s simple and inexpensive to prepare. You can download a sample codicil here.

If an individual includes a bequest to a 501(c)(3) charity in their will, and the funds are distributed to the qualifying charity, and if the estate is subject to federal or state estate or inheritance taxes, the estate should be able to claim a charitable deduction equal to the amount actually distributed. If the estate is not subject to estate or inheritance taxes, there may still be an income tax benefit to including a charity in the will. Many advisors recommend naming the charity as a percentage beneficiary of the individual’s qualified retirement plan (IRA, 401(k), 403(b), etc.) because such a gift avoids income taxes that would otherwise be due if the beneficiary of qualified retirement plan assets is an individual (other than the donor’s spouse) who may be able to defer taxes by rolling the account over to his or her own IRA. Because planning with retirement assets and wills can be complex transactions with significant legal and tax implications, it is always suggested that you check with your own advisors before making any changes to your plans.

Unfortunately, this can happen.

Plan custodians are under no obligation to disburse or roll over IRA funds until they receive a written request. In most cases, the executor or the beneficiary will have to send a death certificate and a request to disburse or transfer funds.

Every plan has a different form and different way to make a transfer. It’s not uncommon for fundraisers to be on the phone relentlessly, for hours, to reach the right person who can tell them exactly what paperwork is needed to complete a transfer.

Most of the time, the beneficiary will have to download a form, then get a notary to witness their signature to authenticate the request.

In the case of a designation of plan proceeds to charity, some plan custodians have been insisting on taking personal information of an officer of the charity, as though the transfer were to an inherited IRA. Advocates in the nonprofit sector have been working to correct the mistaken view that this is required by federal “know your customer” laws.

It’s a simple fact of business — plan custodians just do not want to give up those funds until they absolutely have to.

It is almost impossible to predict the growth of a gift planning program because it is so dependent on how the charity handles its mission message. Put simply, engaged donors make legacy gifts. If they believe in the mission, and believe it has a long-term future, they will create legacy gifts to support it. If the charity does not have a following that has been encouraged to believe in the mission, or the leadership has caused donors to question the long-term viability of the charity, then it can take a long time for planned giving to produce results.

That said, if a charity has a loyal donor base that has been giving on a regular basis, year after year, it should start to see new estate intentions and legacy gifts right away, with some consistency in new commitments within three years. At the same time, annual revenues should go up, as the typical legacy donor doubles the size of his/her annual gift once the legacy gift is on the books, because he/she is even more invested in the future of the charity.

When legacy gifts mature depends a lot on the demographics of the donor-base. If the base is older, legacy gifts are likely to mature sooner. Just keep in mind that most legacy donors tend to get quality medical care and outlive the government’s life expectancy tables. Hence the old adage “If I sign up for a gift annuity, I add five years to my life expectancy.” While the result is true, it is not a causal relationship.

Most charities should worry not about closed legacy gifts, but the percentage of their identified planned giving pool asked to consider a legacy gift. If a charity is consistently out meeting with donors and asking for legacy gifts, the program will grow quickly. Of donors who are ready, one in three will say “yes” right away, creating some easy wins. If a charity has 1,000 planned giving prospects and asks 100 a year, that should be about 30 new legacy commitments per year for ten years. By the time ten years have gone by, there are likely going to be many new additional prospects to ask, plus all of those who did not say yes at the time, but are likely to be ready now. So look at your pool, look at how many you can ask, and start asking! The results will surely follow.

Pooled Income Funds have been out of favor for almost a decade now, largely because they distribute current income only and not realized long term gains. And because dividend income and interest on fixed income instruments has remained historically low, people long since abandoned PIFs for Charitable Gift Annuities and other life-income instruments. In recent years, with interest rates dropping to historic lows, PIFs are even less appealing than they were before.As a result, this is a good time to offer people the chance to renounce their remaining income interest in PIFs in exchange for an additional charitable deduction or in exchange for a gift annuity. In the latter case, since annuities are paying higher rates right now, it seems like a relatively safe time to make the exchange.

The donor makes a gift to your organization and in return, you agree to make fixed payments to them for life. Payments may be made to a maximum of two beneficiaries. At the death of the last beneficiary, the remaining balance of the annuity is used by your organization for the purpose that the donor specified when the gift was made.

Gift annuities operate under a simple contract between you and the donor. They are not trusts, but rather income obligations backed by your organization’s assets.

The donor makes a gift to your organization and in return, you agree to make fixed lifetime payments to them, commencing at a future date. Deferring the start of payments usually gives donors both a higher annuity payout rate and a larger charitable deduction than they could secure from an annuity that starts immediately. This combination of features makes deferred gift annuities an attractive gift option for younger donors who are still in high-earnings years and are looking for both current tax deductions and additional sources of retirement income. (Many donors set the start of payments from their deferred gift annuity to coincide with their anticipated retirement.)

(Our handy Planned Giving Pocket Guide describes all planned gifts.)

A commercial annuity, typically sold by banks and life insurance companies, provides the owner fixed or variable income based on commercial rates of return. These plans establish their annuity rates on the assumption that all of the assets in the plan will be used up by the end of the income beneficiaries’ lives.

A charitable gift annuity is part standard annuity and part charitable contribution. The donor receives a charitable deduction based on the remaining value that the charity is expected to receive after the annuitant’s death. A gift annuity establishes its payments on the assumption that there will be something left for the charity at the end of the contract. Because of the charitable component, rates for gift annuities are usually lower than rates for commercial annuities. However, gift annuities offer more tax benefits than commercial annuities.

Simple answer: Yes. She can do either.

Basically, if she has lost money on the commercial annuity (CA), and wants to switch from that CA to a CGA with your charity, she should sell the CA and use the proceeds to fund a CGA. However, if she has made money from the CA, she should “trade it in” on the CGA by donating the CA to you in exchange for a CGA.

Complicated answer, also known as “the Devil’s in the details”:

There are dozens of types of CAs on the market, and each accumulates and counts gains and losses differently. Also, each company has different regulations about who/when/how to cash in the annuity. In some cases the owner may not be able to donate the annuity to you. In some cases it may be allowed, but the hassle related to getting the company to give your charity the money might not be worth it.

A qualified professional needs to look at the actual contract and the most recent statement. If she has an advisor or accountant who usually prepares her taxes, that person is probably the best-qualified individual to give the most informed and balanced opinion about whether she should sell the CA or donate it to you. Since there are probably more CAs that show losses than gains right now, it would probably make more sense for her to sell the CA, take the losses, and donate cash to fund a CGA. However, she may face stiff penalties, which also vary widely between types of CAs and companies that sell them. There are other tax issues which her tax advisor will be better qualified to address than either you or me.

Also, it’s important to realize that if she paid $50,000 for a CA and it’s now worth $40,000, she may not have any “losses,” since she may have received a cash stream for several years that is calculated (at least partially) as a return of her principal.

So, I’d suggest a variation on the planned giving professional’s standard approach of asking her to seek professional advice before acting. In this case, I would advise her to show both the CGA quote you prepare and the CA contract and statement to her tax advisor and strongly suggest that she ask his advice about her next step. I would add strong language that states that you are not able to make any specific recommendation about her commercial annuity.

Yes, if they use the version called a flexible gift annuity. The annuity contract will set out a range of possible starting dates for payments. Each date will offer progressively higher income rates. The donor’s charitable deduction will be that corresponding to the earliest possible starting date.

As retirement, health and family needs become more clear over time, the donor picks the appropriate starting date in the annuity contract, and requests that you start payments then.

• One portion of the payment will be considered return of principal by the annuity, and thus tax-free to the beneficiary. If the donor funded the annuity with appreciated property, a second portion of the payment will be taxed at low capital gains rates. The balance of the payment will be taxed as ordinary income. This favorable tax treatment, not available on other types of life-income gifts, increases the effective yield of a gift annuity.
• If the beneficiaries live beyond what their actuarial life expectancies were at the time the gift annuity was created, subsequent payments to them will be taxed entirely as ordinary income.
• If the gift annuity is funded with appreciated assets, the donor will not incur capital gains tax at the time of the transfer if he or she is receiving part or all of the annuity payout. Only a portion of the gain in the donated assets is later recognized, and the tax will be spread over the annuity payments.

With most assets, there are times when they are more attractive and less attractive as charitable gifts. For EE Bonds, when given during the donor’s lifetime, it triggers all of the income that has accrued on the bond and it is taxable to the donor when the charity redeems them, even though the bonds have been donated to the charity. This makes it one of the least attractive assets to give while the donor is alive, particularly compared to assets such as appreciated stock.

However, EE bonds are a terrific gift if transferred to charity by bequest. If the donor’s will specifically names your charity as the beneficiary of the EE bonds, then the donor’s estate is entitled to both an income tax charitable deduction for the income attributable to the bonds (IRD) and an estate tax charitable deduction for their value. The tax treatment is similar to naming a charity as the beneficiary of a qualified retirement plan account, where such a gift avoids both income and estate tax.

Your donors and their advisors should fully research this issue before the donor sets up the gift, as the tax laws are always subject to change.

This advice often will cause donors to elect to hold EE bonds which are no longer accruing interest (30 years from issue date) to give through a bequest. If the donor were to redeem the bonds, pay the tax and reinvest the proceeds, what would be the result? If your donor is not near the end of his/her life, the donor may find that paying the income tax and reinvesting the remaining proceeds is a superior option to holding matured EE bonds until death. But that is a question for the donor and his advisors to determine.

First, the donor receives a charitable income tax deduction for the full, fair market value of the assets contributed, minus the present value of the income interest retained.

Second, if the donor uses appreciated property to fund the gift, no upfront capital gains tax is incurred on the transfer, meaning that the entire amount donated can be put to work earning income for the donor.

(Our handy Planned Giving Pocket Guide describes all planned gifts.)

Charitable gift annuities make fixed payments, starting either when the gift is made (an immediate-payment gift annuity) or at a later date (a deferred or flexible gift annuity). Some organizations maintain pooled income funds, which commingle donations, pay beneficiaries varying income depending on the earnings of the fund, and generally operate like a charitable mutual fund. Charitable remainder unitrusts and annuity trusts are individually managed trusts that pay the beneficiaries either a fixed percentage of trust income or a fixed dollar amount.

A unitrust is an individually managed charitable trust paying its beneficiaries income as a fixed percentage of the trust’s value —which is redetermined annually. Income and appreciation in excess of the required payments to the beneficiaries are held in the trust to allow growth. A unitrust pays income to its beneficiaries for their lifetimes, or for a term of up to 20 years, or for a combination of both. A unitrust can have multiple beneficiaries.

The donor can make additional contributions to a unitrust. When the unitrust terminates —at the death of the last beneficiary or at the end of the trust term—the remaining balance is available to your organization to be used for the purpose that the donor specified when the gift was made.

It’s a creative variant of a standard unitrust that allows donors to make a gift and receive a charitable deduction using low-yielding and/or temporarily illiquid assets, such as investment real estate or closely held stock. The flip unitrust holds the asset for a period of time, paying only net current income, if any, to the beneficiaries, and then “flips” to a standard, fixed percentage payment unitrust when an anticipated event, such as the sale of the property held by the trust, occurs. After the flip, the unitrust reinvests in income-producing assets and can pay the beneficiaries at its stated percentage rate for the balance of the trust term.

(Our handy Planned Giving Pocket Guide describes all planned gifts.)

A donor can irrevocably transfer title to a personal residence or farm to your organization, while keeping the right to live in and/or use the property for the balance of their lives, or for a term of years. Even though they haven’t moved out, they receive an upfront charitable deduction based on the fair market value of the property, minus the present value of their retained interest.

A retained life estate allows donors to make a significant gift to you using what may be the most valuable asset they own, yet not disturb their living arrangements or cash flow.

The donor in a retained life estate transaction pays no rent for their use of the property. However, they are responsible for the property’s ongoing taxes, structural maintenance, and upkeep. You and the donor reach agreement about what you will both do if the donor no longer wishes to keep using the property after it has been donated, or if they become unable to continue using it. The terms of this agreement should be very clearly stated in writing before the transfer of the property takes place.

Your organization will perform standard due diligence before agreeing to accept the property. Be especially vigilant if the property is located such a distance away that your personnel cannot easily keep it under routine observation; if the property is already in poor condition; or if the donors appear unlikely to be able to keep maintaining the property.

Your organization purchases real estate or other property from a donor for less than fair market value. The difference between market value and the purchase price is the gift element of the transaction, for which the donor receives a charitable deduction. You and the donor reach agreement over whether you will pay the discounted purchase price in a lump-sum, or in installments over a term of years. The donor pays no capital gains tax on the donated portion of the property. However, they do incur a gains tax on the sale portion, even if the discounted sale price is equal to or even less than their adjusted basis. For this purpose, their basis is pro rated between the gift and sale elements of the transaction.

The donor will need to secure an independent appraisal to establish the fair market value of the property. If the asset being transferred through the bargain sale is real estate, your organization will review the property’s value, marketability, and liabilities before accepting it. In addition, if the property has a mortgage or other lien on it, the donor should satisfy it before the gift is complete. If your organization takes the property subject to the mortgage, the IRS considers that a taxable benefit to the donor, which figures in to the bargain sale calculation.

A charitable lead trust is an individually managed trust that holds gift assets, pays an annuity or unitrust amount to your organization for a period of years, and then returns the remaining balance to the donor or to the donor’s heirs.

A lead trust delivers a steady stream of income to your organization. For donors, a lead trust offers the choice of two different benefits:

• If the lead trust is structured to return its remaining balance to the donor after it has paid income to your organization, it is called a grantor lead trust. The donor receives an upfront deduction based on the present value of your total income payments. The trust’s annual earnings will be taxable to the donor, but by adjusting the amount and duration of the charitable payments, the upfront deduction can offset this subsequent tax. A grantor lead trust can be an attractive strategy for donors who want to maximize their current tax deduction but don’t want to part permanently with a valuable asset.
• If the lead trust pays its remainder to the donor’s children or other heirs, it is called a non-grantor lead trust, and it can be a very effective way to reduce the tax cost of passing assets within a family. First, the estate and gift tax value of assets placed in the non-grantor lead trust will be reduced by the present value of the annuity or unitrust payments to charity. Second, the taxable value of the assets in the lead trust is fixed as of the time the trust was established – any subsequent appreciation will pass to your heirs free of estate and gift tax. A non-grantor lead trust is particularly effective in sheltering the cost of passing ownership of a growing family business on to the next generation.

The trustee is typically a financial institution or one or more individuals with investment and financial management expertise. Donors themselves may serve as trustees, so long as they keep the transactions of their charitable trust separate from their other investments.

The charity that will benefit from the unitrust or annuity trust can serve as trustee. However, because of the relative complexity of managing investments to meet the beneficiaries’ income objectives, plus complying with record-keeping and tax filing requirements, few non-profit organizations do serve as trustee, and data suggests that that number is declining.

An annuity trust is an individually managed charitable trust that pays its beneficiaries a fixed dollar amount or a fixed percentage of the initial value of the assets that funded the trust. Unlike income from a unitrust, payments from an annuity trust do not fluctuate during the term of the trust. Income from an annuity trust can be paid to beneficiaries for their lifetimes, for a term of up to 20 years, or for a combination of both. An annuity trust can have multiple beneficiaries.

The donor cannot make additional contributions to an annuity trust. When the annuity trust terminates – at the death of the last beneficiary or at the end of the trust term – the remaining balance is available to your organization to be used for the purpose that the donor specified when the gift was made.

Unlike a flip unitrust, an annuity trust cannot defer making its stated income payments. Accordingly, it should not be funded with assets like real estate, closely held stock or artwork unless that asset is very likely to sell in the near term.

You’ve come to the right place. Purchase The Ultimate Quick Reference Planned Giving Pocket Guide that also comes with a fold-out “cheat sheet” titled When How and Why to Plan a Gift. At $29.95, it’s a bargain. (Quantity discounts for staff, board members and volunteers.)