The practice of philanthropy has played an enormous role in the building and promoting of education, religion, social welfare, the arts and charitable institutions. While significant sums of tax dollars are spent to combat societal ills and provide for those in need, nearly $300 billion is privately donated each year (according to the Independent Sector) to support a wide array of philanthropic causes. United States tax laws incentivize donors to make charitable gifts through current income tax deductions and gift planning.
Many charitable organizations focus their fundraising efforts on "current" gifts, gifts received in cash (stock or other noncash gifts that can be easily liquidated into cash) and use the fundraising proceeds to cover current programing needs. "Planned" giving uses planning techniques that generally maximize charitable contributions, minimize income and estate taxes to donors and possibly provide for a donor's future heirs.
Many charities have existing donors with an interest in making a planned gift, but either don't know about planned giving or believe a planned giving program is restricted for the use of large organizations such as hospitals and universities. Many organizations may already be receiving "accidental planned gifts" such as bequests and stock donations.
There are three basic types of planned gifts:
- Gifts that anyone can make
- Gifts that pay income
- Gifts that protect assets
Gifts that anyone can make include:
- Estate bequest
- Appreciated securities
- Life insurance
- Artwork, collectibles, books
- Real estate
- Retirement plans, including 401(k) and IRA accounts
These gifts enable individuals to support charitable causes without impacting lifestyle. A donor can make a gift that costs nothing during their lifetime by designating a charity as a beneficiary of estate assets, life insurance policy proceeds or a retirement plan. All of these gifts enable the donor to exclude the gifted assets from estate tax.
Gifts that pay income include:
- Charitable gift annuities (immediate, deferred and flexible)
- Charitable remainder annuity trusts
- Flip unitrusts
- Pooled income funds
Gift annuities provide the donor with a current income tax deduction for the amount funding the annuity less the present value of future annuity payments and provide the added benefit of fixed periodic income payments for life.
A charitable remainder annuity trust can be funded with appreciated assets to generate a fixed payment to beneficiaries. The donor's income tax deduction computation is similar to the gift annuity, but the charitable remainder to be received by the charity must equal at least 10% of the value of the assets contributed.
Flip unitrusts typically don't generate a steady stream of payments to the donor and can accept donated assets that are illiquid, including real estate investments.
Pooled income funds function similarly to mutual funds. Donations of cash or securities from multiple donors are combined, invested and managed together. On a quarterly basis, donor participants receive a proportionate share of earned income based upon their "shares". Shares are computed based upon the ratio of the fair market value of the donated asset to the total asset pool on the date a donation is made. Upon the donor's death, the remaining value of the donated shares is withdrawn from the pool and paid to the charity.
Gifts that protect assets include:
- Charitable bargain sales
- Charitable lead trusts
- Retained life estates
Bargain sales enable donors to receive some cash for property and a simultaneous charitable deduction for the difference between the cash received and the property's fair market value. The donor pays capital gains tax only on the cash amount received. The cash amount can be paid in installments or as a lump sum.
Charitable lead trusts reverse the stream of income payments to the charity rather than the donor and the remaining assets are returned to the donor at the end of the designated term.
Retained life estates enable donors to continue to use the gifted property during their lifetime after ownership has been transferred to the charity.
There are many options for developing a planned giving program, ranging from basic gifts that anyone can make to complex giving vehicles that require professional advice.
The Partnership on Philanthropic Planning ("PPP") is a nationwide organization whose mission is to support donors and charitable organizations, maximize the value of charitable giving and provide a forum for sharing research and education with members. Within this nationwide organization there are 108 local councils throughout the country. To learn more about planned giving and access resources check out the PPP website: http://www.pppnet.org/.
Planned gifts can be transformational to nonprofit organizations, ensuring longevity to continue to meet its mission over the long term by building endowments to generate income that can support the budget and meet cash flow needs.
Nonprofit executives can structure gifts that benefit both the charity and the donor with the assistance of trained professionals. Please contact the professionals at Friedman LLP to learn more about creating a gift planning program.
If you have questions or need assistance with implementing best practices, please contact Sarah Avery at SAvery@FriedmanLLP.com or contact your engagement partner.