What is the difference between a bequest and a beneficiary designation?
A bequest is a gift that you make through a will or trust. A beneficiary designation is a gift you make through a contract. Life insurance, investment accounts and retirement plans are examples of assets that pass by contract. If you don’t name a beneficiary of these contracts, then the assets will go to your estate and pass by bequest. When an asset passes through your estate, it is subject to probate. Though probate isn’t all bad, it can add costs and time delay to estate administration. Most people don’t like that so it’s important to complete and to regularly review your beneficiary designation forms.
You can make a gift to charity via bequest or beneficiary designation form.
A generous donor wants to fund a Charitable Remainder Unitrust (CRUT) with a piece of mortgaged real estate. What options can I suggest?
A CRUT cannot be funded with mortgaged real estate. The three best options are:
- The donor can pay off the mortgage with other assets and funds the CRUT with the real estate. He could even mortgage some other piece of property and then use some of the income from the CRUT to make the mortgage payments.
- If your charity’s gift acceptance policies and your state’s regulations allow, the donor can fund a Charitable Gift Annuity (CGA) with the value of the real estate minus the mortgage.
- The donor can give your charity the property through a bequest.
Can I use personal property to fund a life-income gift?
In some cases, yes. A transfer for that purpose would generally be considered an unrelated use, reducing your charitable deduction. Be sure to consult with your advisors before making a gift decision.
How will the value of my gift of personal property be determined?
For all gifts of personal property worth more than $5,000, fair market value will be determined by an independent appraisal that you will obtain.
Are there any additional tax considerations with these gifts?
Donors do face a hurdle they don’t have to deal when giving securities or real estate. To be deductible at fair market value, items of personal property must be related to the tax-exempt functions of our organization. In other words, we have to be able to use them. Property gifts that are unrelated to our mission may only be deducted at the donor’s cost basis.
What are the benefits of donating personal property?
- You receive an income tax deduction equal to the appraised fair market value of the property, with no capital gains tax due on its transfer to us.
- You can make a gift using property that you no longer need or are able to maintain.
Can I use real estate to fund a life-income gift?
In many cases, yes! Real estate is most often placed in a charitable remainder unitrust, which will pay income to you, your spouse, and/or other beneficiaries, and provide you with income and capital gains tax benefits.
(For more information on unitrusts, see our Gift Plan Detailspage.)
How will the value of my gift of real estate be determined?
For all gifts of real estate worth more than $5,000, fair market value will be determined by an independent appraisal that you will obtain.
How will you determine if the property I'd like to donate is going to be helpful to your charity?
Here are some questions we will need to answer before we can accept your gift offer:
- Can we use the property to help us carry out our mission?
- If not, is the property saleable within a reasonable period of time?
- If we keep the property, will the costs of adapting it to our use and maintaining it over the long-term be reasonable?
- Are there any mortgages or liens on the property?
- Does the property have any environmental issues that could be a liability for us?
What are the benefits of donating real estate?
- You receive an income tax deduction equal to the appraised fair market value of the property, with no capital gains tax due on the transfer to us.
- You remove a large taxable asset from your estate.
- You can take advantage of a variety of gift formats available for a donation of real estate, each offering unique planning benefits.
Can I give stock that has declined in value?
You can, but your deduction will be limited to the current, depressed value of the stock. It’s wiser planning to sell the stock, take a tax loss, and then get a second tax benefit by giving us the cash proceeds.
Can I give closely held stock?
In many cases yes, and considerable tax benefits can result. However, giving closely held stock is more complicated than giving common stock. You will need to establish the fair market value of the stock, and we will look into its marketability and the likelihood that the company will redeem it. We stand ready to assist you if you are considering such a gift.
Can I give you shares of a mutual fund?
Yes, and we can coordinate the transfer with the administrators of your fund.
How do I arrange for a gift of my stock?
It is important that you contact us so that we can assist you with transfer instructions. If you own securities in a brokerage account, we can help you set up an electronic transfer of the shares to our brokerage account. If you possess actual stock certificates, we can tell you how to sign the certificates over to us and fill out a stock power form.
(Our handy Planned Giving Pocket Guide describes all planned gifts.)
How will my gift of securities be valued?
We take the mean of the high and low prices for the security on the day it came into our possession. If the high price was $80 per share and the low price was $70 on that day, your gift will be valued at $75 per share.
What are the benefits of a gift of securities?
- First, you’ll receive a charitable income tax deduction equal to the fair market value of the shares, no matter what you originally paid for them.
- Second, you will pay no capital gains tax on the transfer. This combination of benefits makes giving appreciated securities a very rewarding charitable and financial plan.
(Our handy Planned Giving Pocket Guide describes all planned gifts.)
When creating a legacy society for planned gifts, should the charity establish a minimum donation amount? If so, how much?
If you want to start a passionate debate among gift planners, you are asking the right question! There are generally two schools of thought on this issue. The first group believes that the purpose of legacy societies is to thank donors, period. Because most donors of legacy gifts will have passed on before the gift matures, the legacy society allows the charity to provide the donors with thanks and appreciation during their lifetimes, before it is “too late”. Because legacy gifts will not mature until the future, it is really impossible to quantify the value of the gift, since we do not know how long the donor will actually live. Further, since many of these gifts are for a percentage of a residuary estate or the remainder in a qualified retirement account, the amount will vary depending upon a host of factors outside of the donor’s and the charity’s control. Ultimately, this group believes that it is less important to quantify the gift amount (which is uncertain and can change anyway), and more important to simply steward the donors. They do not require a minimum gift amount to enter their societies, but frequently ask the donors to provide a rough estimate and the designation of the gift, so the charity can be sure to use the gift in the way the donor intends. This group is among the majority today. There is a small but vocal group which believes just the opposite. They argue that a donor is much more likely to keep you in the estate plan if they are a member of a legacy society with a minimum gift amount which they have promised. It also ensures that the charity is not spending more on stewardship than it will ultimately get from the estate gift. Finally, a minimum amount allows the charity the quantify the value of its gift planning program and set up a gift planning pipeline of future expectancies.
<p”>I am personally in the first camp and strongly recommend that charities do not put a minimum gift amount on legacy society membership. Anything that creates a barrier to stewardship makes it less likely that the charity will ultimately get the gift. For example, there is one charity that I have actually elected not to include in my estate plans because my planned estate gift for them might not meet their minimum requirement for legacy society membership. I don’t know for sure, since the gift was to be a percentage of a pool of funds I am leaving to a group of charities. The net result, they are not getting an estate gift because they made me feel like the estate gift I was planning was not “good enough” for them. It has made it so that they are stewarding the relationship, and over time it becomes less and less likely that I will include them in my plans, even as the total pool of funds for charity in my estate plan increases in value. There is no reason for a charity to take this risk.<p”>Thank your legacy donors with a quality stewardship society, regardless of amount, and the rest will take care of itself. The average charitable bequest nationally is $50,000, which will more than enough to cover the cost of stewardship. One institution I work with has an average bequest of $260,000, and no legacy society minimum gift amount. Legacy societies are not about quantifying the exact amount of expectancies or setting up a pipeline. This can be done in a less formal way without creating barriers to entry to the society. The legacy society is to there to thank your donors. If you keep this in mind, and treat your donors with the care and respect they deserve, you won’t be disappointed with the legacy gifts that mature.</p”></p”>
Do you have any information on legacy societies? How to create them...effective use...names, etc.?
I’ll share a little of my personal experience (this answer is from Scott):
This picture is from a newsletter at a former position. It accompanied the story of our newly formed Legacy Society while it was still in the very beginning phases. But the real reason I used it was because that adorable little boy is my son.
We went through a process of soliciting responses from likely members about what we should call our society. “The St. Mary Legacy Society” won by a mile. I thought it was a boring name, but I was wrong. Many professionals want a name that will stand out from the other societies at our friend’s charities, but most cute names leave people wondering what you’re talking about.
We went to the board and to the most likely legacy donors to get “charter members” of the Legacy Society and we had a specific time deadline. This created a capital-campaign-like sense of urgency. We put together a four-member campaign team (patterned after a capital campaign committee) to call and meet with each board member individually. The board chair was on this committee and his goal was 100% participation by the board. Although we didn’t reach that in our short charter time frame, it was an admirable goal and provided a lot of energy.
By the end of our ten-month charter period, we had enrolled 41 members with $8,000,000 in bequest commitments, including one commitment for $3,000,000. This at a hospital which had received a total of $600,000 from 18 individuals during its first 33 years.
So my advice is to go for it. But don’t blow the one opportunity to start well by starting slowly. Get input from your best prospects, buy-in from your boards, have realistic goals and challenging deadlines, and put together a working committee to solicit bequest commitments.
What are the benefits of a charitable bequest?
- You can make a gift that costs you nothing during your lifetime, and keeps your assets under your control.
- You can change your bequest if your circumstances change.
- Your bequest lets us know that you believe we will be doing good work, far into the future.
How can I make a bequest to your organization?
You can give us a specific amount of money or an item of property, or give us a percentage of the balance remaining in your estate after taxes, expenses, and specific bequests have been paid. You can tell us to use your bequest for a particular program or activity here, or allow us to use it for the needs and opportunities that are most relevant to us when your gift is received.
What happens if I die without a valid will?
Some sixty percent of Americans die without a valid will. This is unfortunate in most cases, because state laws will take over and distribute your estate in accordance to a prescribed formula – often in ways that you would not choose. You won’t be able to provide extra help to particular family members who may need it, or benefit friends who have been close to you. And, you won’t be able to help the charities that have meant much to you during your lifetime.
When do I need to change my will?
The circumstances of our lives change constantly. If you already have a will, here are some everyday events that should nudge you to change it: marriage or re-marriage; divorce or the death of a spouse; a new baby, step children or grandchildren; the death of named heirs; the sale of your house, a family business, or any asset that made up a large part of your estate; adjustments in distributions to your heirs to account for lifetime gifts to some of them, or the anticipated need of others for ongoing care after your death; you wish to add or change a charitable beneficiary.
Do I need an attorney to write a will?
Some states allow individuals to compose their own will. If it is properly witnessed and signed, many Probate Courts will accept such a will.
However, most people have no idea how to get started with such a task. And will they adequately cover all the bases in a self-authored document?
A will is a very important legal document. Therefore, in the vast majority of cases, it is wise to take advantage of the expertise of a qualified attorney. A will is one of the least expensive legal documents, and a well-written document will save your heirs much both in dollars and hassle.
How do I select an executor or personal representative?
An executor or personal representative is the person who will manage and distribute your estate in accordance with your will. An executor’s work will be monitored by the Probate Court. An executor does not need to be an expert in finances, probate law or taxes (they should hire experts in those fields to assist them). A good executor will be honest, organized and possess good common sense. Your executor should be willing and able to serve in this capacity, too. Most people will name an adult child, another close heir, or a financial advisor. If possible, name someone who lives nearby and who is familiar with your financial matters. That will make it easier to do chores like collecting mail, selling assets and finding important records and papers.
What's the difference between a will and a revocable trust?
A revocable trust (“revocable” meaning that its terms can be changed during your lifetime) holds title to your property, then distributes it according to the terms of the trust after your death. The probate court does not review these distributions. In states where probate fees are expensive, a living trust can save costs that a will would incur. Also, if you own property in another state, consider a living trust instead of a will to avoid having to deal with two Probate Courts.
However, a revocable trust and a will are both subject to the same amounts of estate and inheritance taxes.
What is a codicil?
It’s an amendment that makes one or more particular changes to a will, but otherwise leaves the document intact. A codicil thus saves the cost and complication of re-writing an entire will.
Download a sample codicil.
What are the benefits of a gift of life insurance?
- You can make a gift using an asset that you may have overlooked: paid-up policies whose coverage your family no longer needs.
- You can create a gift that will benefit us in the future, at little cost to yourself today
- If you donate a policy during your lifetime, you receive an immediate income tax deduction for its current value.
What is the charitable deduction for a gift of life insurance?
- If the policy is paid-up (i.e., no more premiums are due), or you have made some premium payments but not all of them, the charitable deduction will be the lesser of the policy’s fair market value (which is approximately its “cash surrender value”) or the total of your net premium payments.
- To qualify for a deduction, you must make us the irrevocable owners as well as beneficiary of the policy. If you name us beneficiary but retain ownership of the policy, the IRS holds that you have not made a “completed” gift and therefore cannot claim a deduction.
- Similarly, there is no deduction for taking out a new life insurance policy, even if you make us irrevocable owners. You can claim a deduction for gifts you make to us that offset our ongoing premium payments on the policy (since we’re the owner, we pay the premiums).
How do I arrange a gift of a life insurance policy?
Simply contact your life insurance company and request a “Change of Beneficiary/Ownership” Form. Designate us as the new owner and beneficiary of your policy.
Will you cash in my life insurance policy when I give it to you, or hold it to claim the full death benefit?
We make that decision on a gift-by-gift basis. We look at actuarial factors, the size of the potential death benefit, and whether you want us to use your gift for long-term endowment or an immediate project.
What are the benefits of a gift of retirement plan assets?
- You escape the income and estate tax that will both be levied on the remaining balance of your retirement plan if you leave it to heirs.
- You can give us the most-taxed asset in your estate, and leave more favorably taxed property to your heirs.
- You can continue to take withdrawals from your plan during your lifetime.
- You can change the beneficiary if your or your family’s circumstances change.
How do I arrange a gift from my retirement plan?
Simply contact your IRA or retirement plan administrator and request a copy of the Change of Beneficiary Form. Use the form to designate our organization to receive all or a portion or the remainder of your plan’s assets.
What are the benefits of a charitable gift annuity?
- You can use it to convert highly appreciated but low-yielding assets into a lifetime income stream at greatly reduced capital gains cost, while also securing an immediate income tax deduction.
- You will frequently receive a higher payment rate from a gift annuity than from any other life-income gift.
- Your payments will be safe, stable and predictable.
- Part of your annuity payments will come to you tax-free. If you funded your annuity with appreciated assets, another portion of your payments will be taxed at low capital gains rates. Only the remaining balance of the payments will be taxed as ordinary income.
Is it better to give cash or appreciated securities to fund my gift annuity?
Both have distinct advantages. A gift of cash will produce a larger tax-free portion of the annuity. A gift of stock can increase your effective rate of return because of the reduced capital gains cost. Both assets produce the same annuity rate and charitable income tax deduction.
Do you hold my gift annuity in trust for me?
No, a gift annuity is a contract between us, providing for our payments to you in return for your gift to us. Your lifetime payments are one of our general obligations, fully backed by all of our assets.
Can I include my children as income beneficiaries of my gift annuity?
A charitable gift annuity can only be set up for one or two lives. This is typically a husband and wife, but it could be two siblings, two friends, etc. Generally, a child’s longer life expectancy lowers the annuity’s rate of return to an unattractive level.
What are the benefits of a deferred gift annuity?
- By deferring the start of payments, you receive a higher annuity rate and a larger charitable deduction than an annuity paying you immediately could offer.
- If you are a younger donor in high-earnings years, a deferred gift annuity addresses two of your planning needs: a large income tax deduction today, and additional retirement income tomorrow.
- You can plan the payments from your deferred annuity to begin when you will need them, such as retirement or when your grandchildren will start needing help with tuition.
- You can establish a series of deferred annuities over several years, all scheduled to begin paying you when you retire, and paid for with funds you have already set aside for retirement saving.
I'm not sure when I'll retire -- can I choose a flexible start date for my annuity payments?
Yes, you can. You can set a series of alternate start dates in your deferred gift annuity contract, then choose the one that best fits your evolving work, health and family circumstances. Each start date will offer progressively higher payment rates. Your charitable deduction will be based on the earliest start date that your annuity contract provides for.
What are the benefits of a charitable remainder unitrust?
- You will receive an immediate income tax deduction for your gift, while also removing a large asset from your taxable estate.
- If you fund your unitrust with appreciated property, you pay no capital gains tax on the transfer.
- You can use this most-flexible gift plan to hold temporarily illiquid assets; to invest first for growth and then for income with no reduction for capital gains tax; to address short-term family obligations without making long-term commitments of capital.
Can I place real estate or personal property in a unitrust?
In most cases, yes. Remember that an asset like that may not be producing income, and so the unitrust’s beneficiaries may receive little or nothing until a sale and re-investment into income-producing assets.
How can a FLIP unitrust help me?
You can fund it today with assets like shares in a family business or a piece of investment real estate – and take a charitable deduction; and then when a pre-determined event such as the sale of the asset occurs, “flip” the unitrust, at no capital gains cost, into investments that generate lifetime income for you and your beneficiaries.
Can I include my children as income beneficiaries of my unitrust?
It depends on the age(s) of any children you name as income beneficiaries. Our interest in the unitrust must be at least 10% of the value of the assets you donate to it. This interest is calculated using the life expectancies of the income beneficiaries. The younger your children, the longer their life expectancy and the smaller the value of the charitable remainder. Even younger adult children may disqualify the trust.
Who can serve as trustee of my unitrust?
A financial institution, an advisor, or you, yourself, may serve. [Note: Add your organization to this list if your treasurer is agreeable.]
What are the benefits of a charitable remainder annuity trust?
- You will receive an immediate income tax deduction for your gift; pay no capital gains tax on the transfer of appreciated assets to the trust; remove a large asset from your taxable estate.
- You and/or other beneficiaries receive stable, predictable income for life or a term of years.
What if the property has a mortgage or other lien on it?
Debt should be paid off before the gift is complete. If we assume the mortgage, the IRS considers that a taxable benefit to you.
What are the benefits of a charitable bargain sale?
- The difference between market value and the purchase price is your gift, for which you’ll receive a charitable deduction.
- You pay no capital gains tax on the donated portion of the property.
- With one transaction, you can take cash out of an asset andmake a significant gift to us.
- You can apply a lump-sum payment from us toward the price of another property or the entry fee for a retirement facility.
- You can use installment payments from us as supplemental retirement income.
Who can serve as trustee of my annuity trust?
A financial institution, an advisor, or you, yourself, may serve. [Note: Add your organization to this list if your treasurer is agreeable.]
Can I include my children as income beneficiaries of my annuity trust?
It depends on the age(s) of any children you name as income beneficiaries. Our interest in the trust must be at least 10% of the value of the assets you donate to it. This interest is calculated using the life expectancies of the income beneficiaries. Thus, the younger your children, the longer their life expectancy and the smaller the value of the charitable remainder. Even younger adult children may disqualify the trust.
How would the assets in my annuity trust be invested?
Typically, in a balanced portfolio designed to produce both income and growth over the term of the trust. Annuity trusts are also well suited to accept transfers of long-term tax-free bonds and pass tax-free income through to the beneficiaries.
What are the benefits of a retained life estate?
- Even though you haven’t moved out, you’ll receive an immediate charitable deduction based on the fair market value of the property (minus the present value of your future tenancy there).
- You pay no rent for your ongoing use of the property.
- You can make a significant gift with what may be the most valuable asset you own, without disturbing your living arrangements or your cash flow.
- You can terminate your life estate at any time and take an additional income tax deduction.
If I create a bequest or life-income gift, will you continue to ask me for annual contributions?
Your planned gift is a significant addition to our long-term financial strength and our ability to meet the challenges and opportunities the future will bring. However, today’s efforts are supported through annual gifts and we greatly appreciate and encourage any annual support you may want to consider.
What is the best way to let donors know that there will be a fee on their annuities? When donors establish gift annuities, we work through a Foundation that charges 10% on the proceeds that will come to us after the donor dies. Is there a good way to communicate this?
This is always a very delicate thing to communicate and you are wise to ask. On the one hand, we like to be transparent and share information with our prospects and donors. On the other hand, too much transparency may scare them off. The first question I would ask, do you normally share up front what your asset management and administration fees are for CGAs generally? The reason I ask is that most organizations do not. They do not provide the donors with any information about this because it is a cost of doing business. Your fee is also a cost of doing business and you probably do not have a legal requirement to share it.
Even so, a 10% fee is high, particularly if the donor has restricted the ultimate use of the gift annuity. With that in mind, I would share it, but I would not put it on the website. Instead, I would add it to your Gift Annuity Disclosure Statement. As you know, under the Philanthropy Protection Act of 1995, you must provide each gift annuity donor with a disclosure which includes information about how you invest your gift annuity reserves. I would suggest that you include in the disclosure the information that you do not charge any asset management or administration fees for offering charitable gift annuities during the life of the contract, but at termination, 90% of the residuum is put to the designated use and the remaining 10% covers those fees and is paid to the University of Texas Foundation, which provides such services.
Such an approach is transparent without negatively impacting your efforts. It also is placed exactly where a donor would expect it, in the disclosure covering the details of the financial terms. I suspect that you already use a disclosure from PG Calc or Crescendo, which can be customized to include language like this. Once you draft something based on the language above, it will make sense to pass it by your legal counsel for review, as we cannot provide legal advice.
Brian S. Sagrestano, JD, CFRE
Dr. Scott Janney, CFRE
Slip this handy booklet into your pocket before your next round of prospect calls. It’s not another ways-of-giving brochure — it’s a “why’s of giving” that helps you better understand the upside and downside of different giving options for both you and your prospects.