Planned giving is a perfect way to make sure a portion of money, assets, and estate are given to promote the charities or causes near and dear to your heart. There are several types of planned gifts and each is slightly different in the way they work.
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Depending on the plan you choose, you can typically maximize your assets and tax breaks while living, limit the tax burden for your family after you pass away, and benefit the charity of your choice sooner than you thought possible.
A deferred gift is a gift that is “given” to a recipient similar to the way an IOU works. The charity or organization is given information regarding the amount or type of gift they will receive. However, until the owner and/or their spouse pass away, the gift remains in the donor’s possession. Then, upon the death of the owner and their spouse, the gift will be given to the organization.
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Bequests are one of the most common ways a deferred gift is provided to an organization or charity. As a donor, you can decide to give an amount, a piece of land, or another possession to a charity. This is then written in your will. The charity is notified about your deferred gift and they will receive it according to terms set up in your will. Bequests can easily be set up in most types of wills. You can also set up your bequest so that you donate in someone’s name instead of your own.
Many charities gladly accept deferred gifts other than monetary gifts such as land, houses, and valuable items such as vintage vehicles. Check with the charity to get a full listing of the types of items they can receive as part of their giving program. These other options might give you more than one way to leave a legacy with your charity of choice.
This is best for: Donors wanting to contribute to a non-profit cause regardless of how much they have to give.
Life insurance payout
If you want to make sure the bulk of your estate remains within the family but your loved ones don’t need funding from your life insurance policy, you can choose to donate insurance funds to a charity or organization. To gift the life insurance policy payout to a charity of choice, you can name the organization as the beneficiary of your life insurance policy. Upon your death, the charity is notified and they will receive the full amount due as your beneficiary.
Only choose this option if the rest of your estate will provide for your remaining family members. If your family is counting on your life insurance payout to cover costs associated with passing, such as funeral expenses and final medical bills, consider a different option, instead.
This is best for: A donor whose family is supported by other aspects of the estate or is financially stable enough that they don’t need the life insurance policy proceeds.
Qualified retirement plans
A qualified retirement plan is set up by an employer for an employee. While the employee is with the company, both parties contribute to the fund. Generally speaking, money in the plan cannot be accessed until the employee is retirement age. Once the money can be withdrawn, it is taxable as income tax. If transferred to the family upon death, the money is also taxable as estate tax.
Some people choose to use this as a deferred gift to their charity of choice to avoid the tax burden placed on the money in a qualified retirement plan. While taxes will be removed from the total amount before donation, the family’s estate tax burden is not increased since money in the plan is viewed as separate from the estate.
This is best for: A donor whose family isn’t dependent upon the excess retirement income after the donor passes away.
Life Income Gifts
Life income gifts are charitable gifts that you provide to a charity or organization while you’re still living. The organization receives those gifts and pays an amount to you or a designee for a specific number of years or during the duration of your life.
The remainder of your gift goes to the organization once you pass away and/or the designee is no longer living. The amount you receive typically depends on your age when the gift is given and the number of years you want to receive payments.
The benefit to life income gifts is that you receive a charitable tax deduction the year the gift is given, you reduce your capital gains tax in your stock portfolio over the long run, and you establish a guaranteed income.
Charitable gift annuity
In a charitable gift annuity, you give a gift of cash or securities to a non-profit organization. The organization then pays you and/or a loved one a fixed amount for a set number of years or the remainder of your lifetime.
Once you and the other beneficiary pass away or the years run out, the organization can then use the remainder of the gift. If you would rather give the fixed income to a child or another estate beneficiary, the number of years they can receive payments will typically be capped at twenty.
This is best for: Donors who want to give a sizable gift but also want an income stream for themselves or their spouse during retirement.
Remainder annuity trust
This life income gift works similarly to a gift annuity except that you place a cash gift or appreciated securities into a trust. The trust will pay a fixed amount based on the value of the assets at the time of establishment. A maximum of two beneficiaries can be named to receive the fixed income for a set number of years or life, depending on age.
Setting up a trust can be an excellent way to ensure income and designate where you’d like the remainder of your funds to go. It’s important to learn the basics of trusts before establishing one of these for giving purposes.
This is best for: Donors who want to give a gift while still growing assets or those who want the guarantee of a fixed income from the gift given.
This option works similarly to the remainder annuity trust with the only difference being that the trust value is reevaluated annually. As a result, the payments may increase or decrease depending on performance and trust evaluation.
This is best for: Donors who can be flexible with the income received.
This is a unique gift option that harnesses the power of pooling funds with other givers. You give a gift to an organization and the organization places it into an investment pool with other funds. Functionally, this acts like a mutual fund. Investment returns are then paid to you and up to one other beneficiary for life. Once you and the beneficiary pass away, the organization then removes your gift from the pool to use for your designated purpose.
This is best for: Donors who want to invest in a charity stock market-style.
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Complex gifts are giving options that protect your assets by allowing them to get passed on to beneficiaries with a reduced tax liability. These options also enable you to retain control over physical assets such as a house or farm while gaining a charitable tax break while living.
Charitable lead trust
These income gifts work differently than the prior two. In fact, this option is nearly the exact opposite. Rather than you giving a financial gift to an organization and them paying out a fixed amount for life, you give a gift and the organization takes a fixed amount for a fixed period. At the end of the period, the principal amount is given back to you, a designated beneficiary, or another non-charitable beneficiary.
Why might you consider doing something like this? This method is used by people who want to transfer assets to a loved one while reducing their tax liability. By transferring some assets through your will and other assets through a charitable lead trust, you effectively defer the total amount of inheritance your loved one receives at one time, thus reducing their overall tax liability.
This is best for: Wealthy donors who want to transfer tax-advantaged wealth to another generation.
Retained life estate
In a retained life estate, you officially sign the deed of your house, farm, or land over to your charity of choice. Instead of the charity immediately taking the property, you get to retain use of it for life. Only after you and your spouse have passed away will the charity take full ownership.
While you retain your estate, you can live in it, rent it out, farm it, and maintain it however you desire. You are also responsible for all maintenance, upkeep, and expenses related to the property while you live there.
The major bonus besides getting to use your home or land is the fact that you get to take an income tax deduction for the year you deed your property to the charity.
This is best for: Donors who want to use their property while living, gain a tax break, and donate it after death.
This gift allows the donor to sell a piece of property to a charitable organization for a price below the fair market value. The donor then receives a charitable tax deduction for the difference between the sale price and the fair market value of the house.
Why not just sell your property and give the non-profit the proceeds? If you sell the property, taxes are due on the total gain before the donation of funds. You will gain a tax advantage if you choose to go the bargain sale route and then you won’t have to worry about the extra hurdle of tax on any proceeds from the sale.
This is best for: Donors who want to avoid capital gains tax.
Creating a Legacy
Creating a legacy by giving a charitable donation is just one of many ways to leave an impact on the world. No matter how much you have to give or what you want to donate, you can leave a lasting legacy by contributing to a charity of your choice. Make these decisions ahead of time as part of your end-of-life planning to make sure your wishes are known.