Planned Giving

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Planned giving is the integration of personal, financial, and estate planning goals with a person’s goals for lifetime or testamentary charitable giving. It’s an opportunity for charitable giving in circumstances that may not otherwise allow a donor to make a gift to charity.

A planned gift provides options for everyone.  Plans range from simple to complex. Both current and deferred plans may be created.  Flexibility can be built into each plan.  There are many different kinds of options to be explored based on the donors needs and preferences.

This presentation will discuss the most common types of planned gifts. It will go through each type individually and explain the benefits.

A bequest is a gift to charity at a person’s death.  This is the simplest type of planned gift and one of the easiest to implement. Many people desire to benefit charity but are unable to donate property to charity while they are alive.  For example, a donor may have property that is needed during life to cover living expenses or rising health care costs. A donor can retain ownership and use of their property during their lifetime and still benefit the charity by leaving the property to the charity at their death.

A donor can leave property to charity by including a bequest in his or her will or trust or in the case of property that passes by beneficiary designation (such as individual retirement accounts) by designating charity as a beneficiary.

As you can see, a bequest is simple to understand and easy to implement.  The benefits of a bequest include a nice gift to charity.  The charity receives cash or property.  There is also an estate tax deduction.  The amount given to charity is not subject to federal estate tax.  A bequest preserves lifetime flexibility.  A donor is able to use and control property while alive.

A donor wants to make a gift to charity but needs regular payments to supplement income. Donor and charity enter into a charitable gift annuity agreement.  A charitable gift annuity (CGA) is a contract between a donor and charity.  In exchange for a gift of cash or property, a charity agrees to make fixed payments for life. A gift annuity contract can begin making payments immediately (a current gift annuity) or defer payments for at least one year (a deferred gift annuity).

Gift annuities provide many benefits. A donor gives cash or appreciated property to charity and in exchange, the charity makes fixed payments for the lifetimes of one or two individuals.

Gift annuity payments are not dependent upon the charity’s rate of return.  Instead, the payments are based on a rate schedule.  Many charities use a rate schedule set by the American Council on Gift Annuities (ACGA). Under the ACGA’s rate schedule, the older a person receiving gift annuity payments, the higher the rate.

Gift annuities also include partly tax-free payments. Pre-determined portion of each gift annuity payment is tax-free and the remaining amount of each payment is taxable (at either ordinary and/or capital gain rates).

For a Charitable Gift Annuity target donors include older donors who desire fixed payments for life and also donors who have cash or appreciated property that produces little or no income.

A charitable remainder trust is a trust that receives cash or property from a donor, makes payments for a life, lifetimes or term of years and then distributes the rest to charity. If a donor wants to turn appreciated property that produces little or no income into a productive asset without paying capital gains tax on the sale of the property then a charitable remainder trust might be appropriate. The donor contributes the appreciated property to a charitable remainder trust that will sell the property tax-free and then make payments for life or a term of years.

Some of the benefits of a charitable remainder trust include receiving a charitable tax deduction and bypassing gain (trust sells property tax-free). A CRT can last for the lifetimes of one or more beneficiaries or for a specific term of years and pays a percentage of its value to the trust beneficiary.

For a charitable remainder trust a donor with cash or appreciated property with a value of at least $100,000 who wants increased income would most benefit from this plan.

So how is a CRT implemented? An attorney drafts a charitable remainder trust.  Once the CRT is created, the donor transfers cash or appreciated property to the CRT.  The CRT is a tax-exempt trust that can sell the appreciated property without paying capital gains tax.  The trust then makes regular payments to the donor.

Each year, a CRT pays either an annuity amount or unitrust amount to its beneficiaries.  A charitable remainder annuity trust (CRAT) pays a fixed dollar amount each year. By contrast, a charitable remainder unitrust (CRUT) pays a different amount each year.  In most cases; this amount is equal to a fixed percentage of the trust value at the beginning of the year in which the payment is made.

When a donor transfers assets to a charitable trust, those assets may be held by the trust or sold and reinvested.  The taxable nature of the payments made out of the trust depends on the types of investments kept inside the trust.  The process of four-tier trust accounting can be complex, but the concept is simple.  The rule requires payment of income in the order of the tiers shown above: ordinary income first, then capital gain, etc. As a result, all ordinary income earned by the trust must be distributed before any capital gain or tax-free amounts are paid by the trust.

As shown in the table, ordinary income is paid out first.  Ordinary income items include rental income and dividends.  One nice thing about the current tax situation is that dividends are taxed at a favorable rate.

Next, capital gains are paid out.  There are several different types of capital gain property and you can see how each type is taxed at a different rate.  The most common capital gain property is usually short-term or long-term capital gain property, but the other two types may be used as trust investments.

Third is tax-free income from the trust.  This will come from investments such as tax-exempt municipal bonds.

The final type of asset distributed is the tax-free return of basis or principal. The basis or principal is the amount paid for an asset and comes out of the trust tax-free.

The trustee must carefully select and manage the trust investments.  Since the goal for most trusts is to distribute capital gain, the trustee typically will try to minimize ordinary income assets and maximize capital gain assets.

A charitable lead trust is a trust that receives cash or property from a donor, makes payments to charity for a specified period and, at the end of the period, distributes the trust property to a specified beneficiary, usually family.

Some of the benefits of doing a charitable lead trust include a gift or estate tax deduction where the donor receives a current federal gift or estate tax deduction for the present value of the payments that will go to charity.  When the donor gives property to a lead trust and that property plus growth passes to his or her family with no additional tax.

A charitable lead trust target donor would be person who wants to pass specific growth property that is expected to grow substantially to family at low gift or estate tax cost.  A lead trust is ideal for persons with large estates.

An attorney drafts a charitable lead trust (CLT). Once the CLT is created, the donor transfers cash or property to the CLT.  Unlike a CRT, a CLT is a taxable trust.  Every year of the trust term, the CLT will report its income and then take a deduction for the amount that it distributes to charity.  Any excess is subject to tax. After the selected term, the asset then passes to the donor or family.

There are two basic types of CLTs: a family CLT and a grantor CLT.

A grantor CLT receives property and ultimately returns it to the donor.  The donor gets an income tax deduction when he creates the trust.  When the trust calculates its income each year, however, the donor has to report this income on his or her personal income tax return even though he or she did not receive any of the income.  The benefit of a grantor CLT is a large current income tax deduction which can offset a donor’s high income in the year the trust is created.

A family CLT receives property and ultimately distributes it to someone other than the donor.  No income tax deduction is available to a donor who creates a CLT.

In a Life Estate Reserved a charity accepts a gift of property – either a personal residence or farm – and the donor retains the right to use the property for his or her lifetime.

The donor receives a current federal income tax deduction for the remainder value of the home or farm.  And the donor is able to use and control home or farm while alive.

For a life estate the target donor would be an older donor that has enough liquid assets available for living expenses and desires a current income tax deduction.

A donor executes a deed transferring a house or farm to charity.  In the deed, the donor retains a “life estate,” which is the right to live in the home and use it for life.  At the time of the gift, the donor and charity also enter into a “MIT” or maintenance, insurance and taxes agreement specifying the donor’s responsibilities with respect to the home – including the payment of maintenance, insurance and taxes.  After the donor passes away, the asset then passes to a charity.

For a pooled income fund a charity accepts a gift of cash or stock, invests it with similar gifts from other donors and then distributes a proportionate share of earnings to the donor.  At the donor’s death, the charity then receives the remainder.

The donor receives a current federal income tax deduction.  If the donor transferred appreciated property to the charity and this property is sold by the pooled income fund, the donor is able to bypass part of the capital gain attributed to the asset.  Finally, he or she receives a percentage of the pooled income fund earnings every year.

In a pooled income fund the target donor would be a donor who wants a tax deduction and income stream and is willing to give principal to charity.

Donor transfers cash or appreciated property to the pooled income fund and receives an income tax deduction for the present value of what will be left for the charity at the donor’s death.  The PIF sells appreciated property and all capital gain is bypassed.  The cash or property sale proceeds are invested as part of the PIF.  The donor receives a percentage of the PIF earnings each year.  These earnings are usually taxed to the donor as all ordinary income. The charity then receives the remainder after the donor passes away.

With a bargain sale a charity purchases property for less than fair market value or accepts a gift of mortgaged property. At this time the donor gets an income tax deduction for the difference between the fair market value and the sale price of the property.

When establishing a bargain sale there is an immediate benefit to donor.  The donor gets a cash payment or debt relief.  The donor is also able to avoid capital gain on the gifted part of the property.  And, he or she receives a current federal income tax deduction for the part of the property given to charity.

A bargain sale target donor would be anyone that owns appreciated property and wants to benefit charity but needs a benefit in return (either cash or debt relief).

A bargain sale works just like any other sale except that the sale price is a bargain (less than the property is worth).  A donor sells the property to charity and receives a cash payment or debt relief.  The donor gets the cash or debt relief he needs and the charity gets a valuable property for less than full price.  The difference between the sale price and the appraised value of the property is a gift to the charity.