How Do Planned Gifts Work?
If you’re new to planned giving, you’re in luck. Why? Because we’ve taken a complex topic and made it understandable and relatable.
Planned gifts, also called legacy gifts or deferred gifts, come in all shapes and sizes. Nonprofits can choose to offer simple planned giving vehicles (such as outright gifts… bequests, gifts of stock, etc.), to more structured giving vehicles that require an advisor (remainder unitrusts, lead trusts …). It is unnecessary for you to get into the details of these specific vehicles since the donors who would be using them normally rely on their own advisors. Just know the basics.
Below is a sampling of some of the most common gift planning tools, including brief descriptions with videos, as well as typical donor profiles.
Remember, planned giving can get complicated. Marketing them shouldn’t be.™
The Planned Giving Bible: It's the definitive guide to gift planning. It covers the "why's of giving" that helps you better understand the upside and downside of different giving options for both you and your donors.
Outright Gifts (the “Simple” Gifts)
A Bequest is a gift made through a will or a living trust. It’s the most popular planned gift; the easiest to make; and costs nothing during a donor’s lifetime. A Bequest can be included in a new will, or added to an existing will or living trust through a simple amendment called a codicil — often without the expense of hiring a lawyer.
A Bequest is usually a set dollar amount or percentage of an estate that goes to a nonprofit after the donor’s death.
Average Bequest in the U.S. is between $40K — $60K. Of course, we’ve seen them well into the higher 7 figures.
Related: Anatomy of a Bequest (An infographic you can use)
Bequests are one of the easiest and most popular gift plans. This plan can fit any prospect: single, married, childfree or multi-generational, wealthy or not. Often a bequest is simply a set amount or percentage of an estate set aside to make a gift to a nonprofit that your prospect wants to continue to support. Does a donor already have a will and does not want to pay their attorney to change it? In most states a donor can execute a simple codicil (or will addition) to make the gift in a cost-effective manner.
Publicly traded Appreciated Securities that a donor has owned for more than one year can be transferred to a nonprofit organization. The nonprofit then sells the securities and keeps the proceeds, which can be applied to whatever purpose the donor designates. The donor gets an income tax charitable deduction based on the fair market value of the securities while also avoiding capital gains tax.
It’s an easy gift to make and an easy gift to take!
Donors who hold highly appreciated securities for a number of years. Also for donors who do not plan on selling the stock, and want to use the stock to generate income from a Gift Annuity (see below).
A donor can designate a charity as a Life Insurance policy beneficiary. When the time comes, the nonprofit receives the proceeds. This allows the donor to provide a large gift to benefit a nonprofit — often more than they’d be able to donate outright. The donor’s heirs benefit as well, because policy proceeds distributed to a nonprofit are exempt from estate tax.
Donors who hold a paid-up life insurance policy where no one needs the proceeds. Great for donor who do not want to affect current cash flow. The donor will have the flexibility to change his/her beneficiary designation later if his/her circumstances change.
A donor can make a Gift of Real Estate to a nonprofit, removing a large taxable asset from their estate and benefiting by receiving an income tax deduction equal to the appraised fair market value of the property, with no capital gains tax due on the transfer. The nonprofit can then sell the Gift of Real Estate or keep it for its own use.
Donors whose property will face significant capital gains tax and who do not need (or want) to pass their property on to an heir are the best prospects for a real estate gift. Also perfect for properties that are tough to maintain or vacation homes no longer one wants.
Donors can gift items such as artwork, collectibles, books, equipment, or other items of tangible Personal Property. Most times, a gift will yield them a charitable deduction for the items’ fair market value (it must be professionally appraised), with no capital gains liability to the donor or organization. The nonprofit can either keep the property, display it, or sell it and use the proceeds.
Donors who have appreciated property and no heirs, or no interested heirs, are the best match for this type of gift. In some cases, prospects have heirs, but they own a piece of appreciated personal property that their heirs do not want or cannot use.
Like a gift of life insurance, a donor can name a nonprofit as the beneficiary of a portion or all of his/her IRA, 401(k), or other Retirement Plans. When the donor’s estate is settled, the amount designated passes to the nonprofit and the donor’s heirs avoid income and estate tax.
Someone who holds a 401(k), IRA, or other retirement plan and does not need the additional income, and want to give the most heavily-taxed assets in his/her estate to a nonprofit and leave more favorably-taxed property to his/her heirs.
A Charitable IRA Rollover (also referred to as a QCD — a qualified charitable distribution) allows donors 70½ or older to make tax-free IRA charitable rollover gifts of up to $100,000 per year directly from their Individual Retirement Accounts to eligible nonprofits. The funds must be transferred directly to the charity; withdrawing them first will result in a tax penalty.
A donor who does not need the additional income and wants to avoid “double taxation” on the minimum required distribution (MRD).
Life Income Gifts (or, “The Gifts That Pay You Back”)
A Charitable Gift Annuity allows the donor to transfer an irrevocable gift of cash or securities to a nonprofit in exchange for a fixed income payment for life. What’s more, this gift plan entitles the donor to an immediate charitable income tax deduction. At the end of its term, the Charitable Gift Annuity balance goes to the nonprofit to support its mission.
Charitable Gift Annuities are great for donors who want to make a gift but need retirement income now in order to take care of current or anticipated expenses. Typically, this is for conservative donors who are cash conscious or who are concerned about their own or a spouse’s needs as they age. Donors who are concerned about their children’s retirement may be interested in funding a deferred flexible gift annuity for their children’s benefit.
With a Pooled Income Fund, a donor’s gift is pooled with gifts from other donors who support the same nonprofit, and then invested to pay each donor a quarterly income calculated from their share of the fund. As each participant passes away, the nonprofit receives a gift in the amount of that donor’s share of the fund. Donors can avoid capital gains tax by using appreciated assets for their gift.
Pooled Income Funds are best suited to philanthropic donors who are “investors.” They are often interested in and invested in the stock market, so this type of gift appeals to the prospect’s financial type while providing them with a comfortable way to make a meaningful gift to their favorite charity.
A Charitable Remainder Unitrust is a charitable trust that pays a percentage of its principal to the donor and/or other income beneficiaries the donor names for life, for a term of up to 20 years, or for a combination of both. Because it is revalued annually, payments may increase over time. The donor receives a charitable income tax deduction for a portion of the value of the assets placed in the trust. After the Charitable Remainder Unitrust terminates, the balance goes to the nonprofit.
You like flexibility. You can use almost any asset to fund a unitrust, including cash, publicly traded stocks and bonds, closely held stock, partnership interests, and real estate. You can tailor your unitrust to meet many financial or estate planning goals. You can choose to receive income beginning immediately or you can structure the trust and its investments to defer most of your income to a future time (a Flip Unitrust).
A Charitable Remainder Annuity Trust allows a donor to contribute appreciated assets to the trust, generate a fixed income stream, defer or eliminate gains, and reduce estate taxes. The Charitable Remainder Annuity Trust pays its beneficiaries a fixed amount based on the percentage of the initial value of the assets used to fund the trust. Payments can be made for the beneficiaries’ lifetimes, or for a term of up to 20 years, or for a combination of both. No upfront capital gains tax is applied to contributions of appreciated property to an annuity trust. After the annuity trust terminates the balance or “remainder interest” goes to the nonprofit to be used as the donor designated.
You want to make a major gift while retaining or increasing your income from the assets you contribute. This gift is even more attractive if you hold appreciated stocks or bonds and want to avoid the capital gains cost of a sale. Donor also prefers the stability of a fixed income.
Gifts That Protect Assets (Complex Gifts)
A Charitable Lead Trust is the reverse of a Charitable Remainder Trust. After a donor makes a gift, the Charitable Lead Trust pays income to the donor’s designated charity first, for a term of years or for the donor’s lifetime. After that, the trust assets are passed back to the donor or designated beneficiaries.
Charitable Lead Trusts are for donors who want to fund a gift now and transfer tax-advantaged wealth to another generation. Lead Trusts work best when funded over $1,000,000, meaning this gift plan is for wealthy donors.
In a Retained Life Estate, a donor transfers a property deed — a residence, vacation home, farm, etc. — to a charity, but retains the right to use (including rent out) or live in the property for life or a term of years. In exchange, the donor receives an immediate income tax deduction based on the fair market value of the property minus the present value of the retained life estate. The donor must cover any expenses and maintenance costs associated with the property during their lifetime.
Similar to a gift of real estate, a prospect who wants to retain use of their home for their lifetime but does not need or want to include their property in their estate plan will benefit from retained life estates.
In a Charitable Bargain Sale, a donor sells property to a nonprofit for an amount less than the property’s fair market value, and receives a charitable tax deduction equal to the difference between the market value and the sale price. This can sometimes be more financially advantageous to the donor than selling the property, paying taxes, and then making an outright charitable gift from the proceeds of the sale.
A donor who faces significant capital gains issues and wants to receive a lump sum payment and a tax deduction is the right match for a Charitable Bargain Sale.