Strategic Giving

Many people desire to benefit a charity, but cannot donate property to the charity while still alive. For example, an individual may need certain property to cover their living expenses or rising health care costs. A bequest is a gift to a charity at the time of one’s death. It is the simplest type of planned gift and one of the easiest to implement. Donors can leave property to a charity by including a bequest in their will or trust, or, in the case of property that passes by beneficiary designation, a gift can be made by designating specific charities as beneficiaries.

With a bequest, donors can retain ownership and use of the property during their lifetime and still benefit the charity by leaving the property to them upon their death. The charities benefit by receiving cash or property, the donors’ heirs benefit, because the amount given to charity is not subject to federal estate tax, and the donors benefit through the flexibility of being able to use and control the property while alive.

With a Charitable Gift Annuity (CGA), in exchange for a gift of cash or property, a charity agrees to make fixed payments for life. This benefits donors who want to make a gift to charity, but need regular payments to supplement their income. The charity benefits through the receipt of the cash or property.

By entering into a CGA agreement, the donor receives fixed payments to one or more individuals for life, a portion of each gift annuity payment is tax-free, the annual gift annuity payouts are based on the donor’s age (rates are higher for older donors), and the donor receives a current federal income tax deduction.

CGAs especially help older donors who desire fixed payments for life. CGAs are also attractive to donors with cash or appreciated property that produce little or no income.

In a CGA, payments are not dependent upon the charity’s rate of return. Instead, they 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 schedule, the older a person receiving gift annuity payments, the higher the rate.

A CGA contract can begin making payments immediately (“current gift annuity”), or defer payments for at least one year (“deferred gift annuity”).

Annuity payments are backed solely by the full faith and credit of the issuing organization and are not insured or otherwise guaranteed by any government agency.

A Charitable Remainder Trust (CRT) receives cash or property from a donor, makes payments for a lifetime or term of years, and then distributes the rest to charity. This benefits donors who want to turn appreciated property that produces little or no income into a productive asset without paying capital gains tax at the sale of the property. The charity benefits through the receipt of the cash or property upon the end of the term or the donor’s death.

In a CRT, the appreciated property is sold tax free, with donors receiving payments for life or for a term of years. Not only do they receive a percentage of the CRT’s value, but they also receive a current federal income tax deduction. A CRT especially benefits those with cash or appreciated property with a value of at least $100,000 and who want increased income.

An attorney drafts a CRT, after which the donor transfers cash or appreciated property to it. The CRT is a tax-exempt trust that can sell the appreciated property without paying capital gains tax. It can last for the lifetimes of one or more beneficiaries or for a specific term of years.

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 percentage of the account value each year.

A Charitable Lead Trust (CLT) receives cash or property from a donor, makes payments to charity for a specified period, and distributes the rest to a specified beneficiary, usually family members with no additional tax. This is ideal for donors who want to give property to family members and pay as little gift or estate tax as possible.

The charity benefits through the payments, and the donors benefit through the property and its growth being passed to family members. They also benefit through receiving a current federal gift or estate tax deduction for the present value of the payments to charity.

A CLT is especially beneficial to a donor who wants to pass along specific property that is expected to grow substantially in value. CLTs are ideal for those with estates of $2 million or more who want to pass property to family members, so as to minimize gift or estate tax costs

An attorney drafts a CLT, after which the donor transfers cash or property to it. Unlike a charitable remainder trust (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.

Life insurance is a common choice of planned gifts. Making a gift of a life insurance policy to one’s favorite charity appeals to a variety of donors, because it is a flexible, cost-effective and, in many cases, tax-advantaged way to make a major gift that will benefit the nonprofit after the donor dies. Life insurance can also be used as an asset-replacement strategy. Under this strategy, a donor makes a gift of an asset (such as real estate or appreciated securities) to the nonprofit and replaces the value of that asset to benefit his/her heirs with a life insurance policy owned in a way that eliminates estate taxes on the benefit that is paid to the donor’s heirs.

The use of life insurance as a charitable gift doesn’t have to be a boring choice, however. There are many ways to “change it up” to suit the needs of the nonprofit organization and a donor’s planning goals. Most donors and nonprofit organizations think of life insurance only as an asset that produces a future benefit for the nonprofit organization. However, by using the wealth-replacement strategy and/or the life settlement solution the needs of the donor’s family and the nonprofit can be met.

With a life estate, a charity receives a gift of property — often a personal residence or other real estate — and the donor benefits through the retention of the right to use the property for his or her lifetime. This helps donors who may desire to leave their house or farm to charity at death, but would like a current tax benefit, as well as the ability to continue to use the property. A life estate especially benefits older donors who have enough liquid assets available for living expenses and desire 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” — 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 (maintenance, insurance and taxes) agreement specifying the donor’s responsibilities with respect to the home — including the payment of maintenance, insurance and taxes.

In a Pooled Income Fund (PIF), a charity receives a gift of cash or securities, invests it with similar gifts from other donors and then distributes a proportionate share of earnings to the donor. This helps those who may desire to leave property to a charity at death, but who currently need to supplement their income.

When starting a PIF, the donor receives earnings from the fund for life. When the donor dies, the charity keeps the PIF shares. The donor bypasses gain when appreciated property is sold, receives a current federal income tax deduction, and receives a percentage of the earnings every year. PIFs especially benefit donors who want a tax deduction and income stream, while being willing to give the principal to charity.

The donor transfers cash or appreciated property to the PIF 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. Each year the donor receives a percentage of the PIF earnings, which is usually taxed as ordinary income.

Pooled income funds are typically invested in marketable securities that are exposed to domestic and global economic conditions, market risk, interest rate risk, and currency risk.

In a bargain sale, a charity benefits through the purchase of property for less than fair market value or accepts a gift of mortgaged property. This helps those who desire to benefit a charity, but cannot afford to give an entire property to the charity, or who may have mortgaged property they are willing to give to charity.

When executing a bargain sale, donors receive a cash payment or debt relief, avoid gain on the part of the property that is a gift, and receive a current federal income tax deduction for a part of the property given to charity. Bargain sales especially benefit those who own appreciated property and want to give to a charity, but who need 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). 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.)