WHAT IS PLANNED GIVING?
"Planned giving" is a term commonly used to describe a wide variety of giving vehicles that allow you to give to charity during your lifetime and/or after your death, while meeting your current income needs and providing for your heirs. Planned giving is typically done in conjunction with estate planning, and is a viable option for donors of all income levels.
From a donor's perspective, planned giving is attractive for many reasons. It may allow you to make larger gifts than you otherwise could out of your current assets. Depending on how a planned gift is set up, it may also let you receive a stream of income for life, earn higher investment yield, or reduce your capital gains or estate taxes. Planned gifts often appeal to people who want to benefit a charitable organization but aren’t certain how much of their assets they’ll need for themselves during their lifetimes.
PLANNED GIVING OPTIONS
The most common types of planned giving vehicles are gift annuities, charitable remainder trusts, charitable lead trusts, charitable bequests and beneficiary designations.
Gift Annuities
A charitable gift annuity provides you with lifetime income. To establish a gift annuity, you contribute funds or assets to a nonprofit organization, and that nonprofit in turn makes fixed annuity payments to you from its general assets for the rest of your life. You receive an immediate income tax deduction for a portion of the gift, and a portion of each annuity payment is treated as a tax-free return of the investment. The portion of the gift not used for payments benefits the nonprofit organization.
Charitable Remainder Trusts
A charitable remainder trust allows you and/or other designated beneficiaries to receive income from a trust for your lifetime(s), or for a period of years not to exceed 20. At the end of that time, the balance of the trust is transferred to a charity that you have selected. You can take a charitable deduction for a portion of the gift you make to the trust in the year the trust is formed. (In some cases, additional funds may be added in later years.) The two most common types of charitable remainder trusts are annuity trusts and unitrusts, which differ in how the income you receive from the trust is calculated and distributed.
Charitable Lead Trusts
A charitable lead trust allows you to designate a charity to receive a regular, fixed amount from a trust for a specified time period or the lifetime of a designated person. At the end of that time period, the remainder of the trust passes to your designated heirs or other non-charitable beneficiaries.
Charitable Bequests
The term "charitable bequest" is used to describe anything you give or leave to charity from your estate through a will or a revocable inter vivos ("living") trust. An "estate" is any property, money or personal belongings that you may have at the time of your death. Most people leave an estate when they die, even though they may not have a great deal of wealth. Even an individual with a small estate can arrange to leave a charitable bequest.
You can arrange to bequeath a gift from your estate in several different ways. You can set aside a specific dollar amount, leave a percentage of your estate, or leave any assets left over after your family has been provided for. Some people use a bequest to give a charity something they own, such as a car, home, art or jewelry. Others leave a paid life insurance policy or other financial investments, such as stocks, bonds or CDs. These gifts may provide tax savings. Consult a professional advisor for details.
A bequest to The George Nethercutt Foundation is a simple as adding a codicil to your will. This is the most common planned gift and it may provide you with valuable estate tax savings.
Beneficiary Designation
By designating a charity as the beneficiary of your life insurance or retirement assets, you can enjoy some flexibility in your charitable giving as well as certain tax advantages. The designated charity will receive the specified assets upon your death, and you have the option of changing the eventual recipient throughout your life. For more information, see the What to Give section below.
WHAT TO GIVE
Below you will find a brief overview of some of the most common types of assets that you can donate to charity, and some of the tax implications. Consult a professional advisory for more details.
Cash and Cash Equivalents
We’re all familiar with donating cash to charities. If you itemize your deductions on your personal federal income tax return, you may take a charitable gift deduction for the amount of your charitable gift of cash and cash equivalents (certificates of deposit, savings bonds, money market fund, etc.). If you can’t take the entire deduction in the first year because of this limitation, you may carry the balance forward into the next five years.
When savings bonds, certificates of deposit and other ordinary income assets are given to charity, the recipient charity, unlike the family, will not have to pay tax on the gain in those assets. You can name the charity as the primary or contingent beneficiary, or as a partial beneficiary.
Publicly Traded Securities
You can transfer ownership of appreciated securities owned for at least one year to a charity and receive a deduction for the average value of the security on the day of the transfer. When the security is sold by the charity, neither you nor the charity will have to pay capital gains tax. You receive the benefit of having your gift valued at fair market value, including the appreciation, for the purpose of determining your charitable deduction. For these long-term capital assets, you may claim an income tax charitable gift deduction for the year in which the gift is made. If you can’t deduct the full fair market value of the gift in the first year, you may carry the balance forward for the next five years. If the securities have been owned less than one year, the charitable deduction is based on your cost basis in the security.
Life Insurance
By designating a charity as the beneficiary of a new or existing life insurance contract, you can make a significantly larger charitable gift than may be possible out of your current assets. And, if you make a charity the owner of the contract, you can deduct the premiums as you pay them. Or, if you would rather retain the right to change beneficiaries on the contract and don’t care if you can’t deduct the premium, you can remain owner of the contract and simply name the charity as partial, sole or contingent beneficiary.
Real Estate
You can make outright gifts of real estate to a charity. If you have owned the donated property for at least one year, both you and the charity can avoid paying capital gains taxes on the appreciation in the value of the property. Outright gifts of real estate will often result in an income tax deduction equal to the fair market value of the property, as determined by appraisal, but there are some situations where this may be reduced.
It’s possible to make a gift of your personal residence, vacation home, or farm to a charity and retain a "life estate" in the property, allowing you to retain rights to use or rent out the property until your death. You deed the property directly to the charity subject to your retained life estate, receive an immediate income tax deduction for a portion of the appraised fair market value, and have the comfort of knowing that the property will be excluded from probate.
If the donated real estate is a long-term capital asset, you may claim an income tax charitable gift deduction for the donation. If you can’t deduct the full fair market value of the gift in the first year, you may carry the balance forward for the next five years.
Retirement Assets
Distributions from certain kinds of retirement assets — such as individual retirement accounts (IRAs), tax-sheltered annuities, and 401(k) and 403(b) plans — are subject to income tax and may be subject to generation-skipping taxes and estate taxes. However, gifts of these assets will not be taxed if they are paid directly to a charity as beneficiary. You can designate all or a certain percentage of your retirement assets to go to charity. It is important that you seek professional advice to determine how your retirement asset distributions will be affected by naming a charity as a beneficiary.
Under current law, if you wish to make a gift of IRA assets to charity, you must first withdraw the assets, recognize the distribution for income tax purposes, contribute the funds to charity, and then claim an income tax charitable deduction to mitigate the income tax liability (Note: there may be penalties for early withdrawal of your IRA assets).
In-Kind Gifts & Pro Bono Services
In addition to cash contributions, some companies donate their products to charity — often referred to as "in-kind" gifts — or offer their services on a free "pro bono" basis. Many companies have products that can be used by nonprofits, including products from current inventory, obsolete merchandise, returned or slightly damaged goods, computers, or office furniture and equipment. Nonprofits can also benefit from services provided by a company or its employees, such as printing, legal representation or publication design.
A company’s charitable donation of its products can qualify for a charitable deduction. However, limitations exist on what and how much can be deducted. The rules are complicated and require careful prior analysis by corporate or outside counsel. The value of staff time donated to a nonprofit organization is not deductible, although out-of-pocket expenses (gas, mileage, meals, etc.) for such volunteer work can be deducted within certain limits.
