The ABCs of Planned Giving

To some people, the thought of a planned giving program can seem somewhat ominous. For an organization without a full-time development director--where the executive director wears numerous hats--it may also seem overwhelming.

The thing to realize is that a planned giving program is not the same thing as just asking to be included in a person's will.

A planned giving program can be a "win-win" scenario for the donor, the nonprofit organization and for the donor's heirs. By selecting the most appropriate planned giving vehicle, the nonprofit will receive a contribution, the donor will get benefits that exceed a straight-forward gift while they are still alive, and, depending on the vehicle, the donor's heirs may benefit.

For a donor, a planned giving program is a way to help them get more from their assets. For a nonprofit, the financial benefits are obvious. By using a planned giving program, an organization can increase its gifts without asking the donor to give more. However, planned giving is for long-term programs, not an immediate program such as a capital campaign where assets are needed in a relatively short period of time.

A donor can give cash or cash equivalent such as a Treasury-bill, art work, jewelry, securities, stocks, bonds, life insurance, real estate, or interest in a closely-held business.

Planned giving is a complex and vast subject. What follows is a brief introduction aimed at providing some basic ideas of some of the planned giving vehicles that donors can use to give to 501(c)(3)s.

Outright Gifts are, obviously, the least complicated of all processes. A donor simply writes a check, makes a charge to her credit card, or wires money. The considerations of an outright gift are that there are no size limits, the donor can take income tax deductions (as allowed by law) and she has no retained interest in the gift.

Gifts of Insurance are those where the donor makes the organization the owner and beneficiary of a life insurance policy. The bonus is that the donor receives income tax deductions on the premiums. A gift of insurance might work like this: An individual purchases a $500,000 life insurance policy for herself. The policy is to be funded by 10 annual payments of $5,000, for a total cost of $50,000. She signs the policy over to the nonprofit organization making it the sole beneficiary at the time of her death. The benefit to the donor is that she will receive an income tax deduction on the premium payments and the nonprofit will eventually receive a half-million dollars upon her death.

Pooled Income Funds are the collected funds of several donors that are put into one trust that is managed by the nonprofit organization or by an assigned outside party. The nonprofit owns the assets, but interest earned from the assets are paid out to the donors for the remainder of their lives. From a donor's perspective, the benefits of a pooled income fund include: A lifetime income from the fund, no capital gains taxes, and the donation is partially deductible from income taxes (the IRS has a method to determine to what extent). The trust is irrevocable; this means that while the donor can elect to change the nonprofit that receives the gift, the gift must be given to a nonprofit organization once a trust is established.

Charitable Remainder Trusts are similar to pooled income funds, except that income is still paid to a surviving spouse until his/her death. There are two types of charitable remainder trusts: Unitrusts and Annuity Trusts. A charitable remainder unitrust pays a set percentage of the total value to the donor. Because the income is based on the value of the trust, it may vary from year to year depending on the performance of the investment within the trust. A charitable remainder annuity trust pays a fixed percentage of the original value to the donor each year.

Wealth Replacement Trusts are designed to replace, for the donor's heirs, the assets they would have received if a gift had not been made to the nonprofit. They are used most often by those donating appreciated assets to a charitable organization through a charitable remainder trust and pooled income funds. In addition to a charitable remainder trust, a donor would establish an irrevocable life insurance trust with her heirs as beneficiaries. This trust would be funded with a life insurance policy. The premiums for this policy are normally paid from the increased investment income provided by the charitable remainder trust. When the donor and spouse pass away, the heirs will share the death benefit from the insurance policy, and the nonprofit will still receive the donated property.

To help illuminate the last three types of planned giving, we offer a simple example. Ms. X is nearing 65 years and is planning to retire. As she will no longer be earning a salary she will need an increased amount of investment income to live. She has some property (say real estate or stock in a family company) that is presently worth $1,000,000, but it generates no income. She was given the property a long time ago at virtually no cost so that if she sold the property she would have nearly a $1,000,000 gain. Assuming a capital gains rate of 20%, after she paid the tax on the gain, she would have $800,000 left over to invest. If she invested this amount at 8% a year she would receive an annual income of $64,000. If, however, she gave the property to a tax-exempt nonprofit in accordance with one of the above three vehicles, the organization would be able to sell it without paying any taxes, invest the proceeds, namely $1,000,000, at 8%, and pay Ms. X $80,000 each year for the rest of her life. Thus, Ms. X would receive $16,000 more each year than if she had sold the property and invested the proceeds herself. Moreover, Ms. X would get a sizable charitable contribution deduction in the year she made the gift. (Two points. When the capital gains rates were higher these types of gifts were even more advantageous. Second, Ms. X would, of course, pay an income tax on the income she received from the nonprofit as would have been the case if she had invested the after-tax proceeds of the sale on her own.)

How does a nonprofit educate its donors about these possibilities of a planned giving program? One way to begin might be to establish a board committee to study the possibilities in consultation with a professional tax attorney or estate planner. After all, the people most likely to utilize a planned giving program are your board members.

Copyright 1998 Nonprofit Coordinating Committee of New York