Many Ways to Give
Making an outright gift of cash or other assets is the most common form of charitable giving. However, if you are doing long-term financial planning or estate planning, you may wish to consider planned or deferred giving as a way to achieve your charitable and financial goals.
Bequests are the most common and popular forms of planned gifts. A bequest is simply a statement contained in a donor’s will directing that assets be given to a charity upon the donor’s death. Bequests can involve specific dollar amounts or percentages of a donor’s estate. And donors can designate bequests toward the general support of a charity, or toward a specific program or purpose. Bequests must be included in a donor’s will, but most are very easy to create.
Charitable Gift Annuity
A Charitable Gift Annuity is simply the transfer of cash or other assets to a charity by a donor in exchange for a fixed annual payment to the donor for life (or to the donor and another beneficiary for both lives). The payment rate is based on the number of annuitants and their ages; generally, the older the donor, the higher the payment. Charitable gift annuity rates may be somewhat lower than commercial annuity rates, but usually much higher than CD or money market rates. Gift annuities are considered a form of insurance, and charities are required to maintain sufficient reserves to guarantee that the annuities will be paid over the lives of the donors. Gift annuities are very easy to create. They provide a partial tax deduction for the transferred assets, and a portion of the annual annuity income is tax free.
Charitable Lead Trust
A charitable lead trust is a “temporary” trust set up for a specified number of years, removing trust assets from the donor’s estate. The trust pays income to one more designated charitable organizations each year, which the charities can use for general support or for a purpose designated by the creator of the trust. The creator of the trust or another designated beneficiary receives the trust assets at the termination of the trust. Lead trusts are highly complex gift instruments. They usually require sizable legal and management costs, so lead trusts need to be funded with a very substantial sum of assets. Income is generally subject to taxation.
Charitable Remainder Trust
A charitable remainder trust is an irrevocable trust created by a donor with cash or other assets with a trustee, in return for the donor (or other beneficiaries) to receive income for life or for a specified number of years (generally not to exceed 20 years). A charitable remainder annuity trust provides income to the donor of a payout percentage based on the value of the trust when it established. For example, if the initial value of the trust is $100,000 and the payout percentage is 5%, the donor or beneficiaries will receive $5,000 annually for the duration, regardless of the changing value of the trust assets. A charitable remainder unitrust, on the other hand, provides variable income to the donor or beneficiaries, based on the fluctuating value of the trust assets. For example, if the initial value of the trust is $100,000 and the payout percentage is 5%, the donor or beneficiaries receive $5,000 the first year. But if the value of the assets increases to $110,000 the following year, the payout is then $5,500. Donors receive partial tax deductions for the assets transferred into the trust. Charitable remainder trusts are complex, and require the services of an attorney and accountant.
A donor-advised fund is often termed a “charitable checking account.” Donors can contribute cash or other assets to the fund at their discretion, which is usually sponsored by a large charitable organization, such as a community foundation. Some investment firms also sponsor philanthropically-related donor-advised funds. Donors can make contributions to their “accounts” periodically, and make recommendations to the sponsoring charity on grants made to the fund. However, the sponsoring charity is not obligated to follow these recommendations. Donor-advised funds give donors the ability to make charitable gifts at will, or time gifts to meet their unique tax requirements, without designating specific beneficiaries at the time gifts are made.
Life insurance gifts can take several forms. For instance, donors can contribute paid-up or partially paid-up policies to a charity, or donors can actually buy a life insurance policy on behalf of a charity. Some conventional life insurance policies on the market include a charitable gift option which the policy owner can use if he or she buys enough insurance. Corporations occasionally make modest charitable life insurance policies available to key officers and managers. Generally, life insurance gifts can be created simply by designating one or more charities as beneficiaries. Tax deductions are limited to policy surrender values or premiums paid, and the purchaser of the policy must designate the charity as irrevocable owner and beneficiary. The tax advantages of life insurance gifts may not be as significant as other types of planned and deferred gifts, so life insurance is not the ideal giving tool for many donors.
A private foundation is an incorporated not-for-profit organization that generates ongoing charitable support from income-producing assets. Private foundations are often established to create family or corporate legacies. Private foundations can be structured to exist in perpetuity, or for a limited number of years. Private foundations do have drawbacks, however. They require ongoing governance and management, and are regulated under federal and state laws. Private foundations require a very significant investment of cash or other assets to be effective and economical.
For many donors, retirement plans (including IRAs) comprise a large portion of their assets. Donors over age 70½ can contribute all or a portion of a retirement plan to charity, usually by designating one or more charities as beneficiaries on the retirement plan’s beneficiary designation form. By gifting retirement assets to charity instead of individuals, donors can achieve very significant tax savings.