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What is Planned Giving?
Elaine Bedel, President, Bedel Financial Consulting, Inc. and IU School of Nursing board member, discusses planned giving and the best method that fits your family’s wishes.
Planned giving actually involves three gifting methods; outright gifts, expectancies and deferred gifts. Some planned gifts give an immediate benefit to the charity, others provide a deferred benefit and some do both.
Outright Gifts
Outright gifts provide an immediate benefit to the charity through the transfer of assets directly to the charity or to a trust that provides benefits to a charity or charities.
Transfer of Appreciated Assets
The transfer of appreciated assets directly to a charity is a form of planned giving. Appreciated assets may include shares of stock or mutual funds; appreciated real estate (a house, a farm, or a building, for example); or collectibles such as paintings and artifacts.
Advantages
• The full fair market value of the gift asset can be used as a charitable deduction.
• You avoid paying any capital gain tax that would be due if you sold the asset.
• The size of your estate will be reduced for estate tax purposes.
• The charity has immediate control and use of the asset
Disadvantages
• You give up the asset and it is no longer available for your heirs.
• You can no longer receive income or have personal use of the asset.
With this type of gift, you must feel confident that your remaining assets can meet your family’s needs.
Charitable Lead Trusts
A charitable lead trust enables you to give away only a stream of income from the asset and then get the asset back at the end of the term of the trust. For example, you place an income producing property into a charitable lead trust for a specific number of years. During the term of the trust, the annual income is distributed to the charity. At the end of the term, you get the property back along with all the rights of ownership.
Advantages
• The charity has immediate use of the annual payment.
• The asset is returned to you for your benefit or that of your heirs at the end of the trust term.
• You receive an income tax benefit for the gift to charity.
Disadvantages
• During the term of the trust, the arrangement is irrevocable.
• Ownership rights only return at the end of the term.
• Since the asset comes back to you, it is not removed from your estate for estate tax purposes.
• A trust document must be created, which will create some expenses.
Expectancy Gifts
An expectancy gift is a promise to make a gift at your death. You can do this through a bequest or by naming the charity(s) as a beneficiary.
Bequest
You can make a bequest by including a directive in your will or trust document to pass either cash or specific assets to a charity(s) at your death. Your gift can be a specific dollar amount or a percentage of your estate.
Beneficiary
You can name a charity as the beneficiary of all or a portion of a retirement account.
Advantages
• You have the use of the asset until you die.
• It eliminates the concern that you are giving away assets that you may eventually need to meet your own living expenses.
• You can change a bequest or beneficiary designation during your lifetime.
• The amount that goes to the charity reduces the value of your estate for estate tax planning purposes.
Disadvantages
• Because the gift was not made during your lifetime, you did not receive an income tax benefit.
• Unless you inform the charity of your expectancy gift, you will not receive acknowledgement during your lifetime.
Deferred Gifts
A deferred gift is an irrevocable transfer of an asset, but the charity does not have full benefit until some point in the future.
Charitable Remainder Trust
You make a gift of an asset to a charitable remainder trust. Annually, during the term of the trust, income is returned to you. At the end of the trust term, the assets of the trust are distributed to the charity(s) named in the trust. The term of the trust can be expressed by a number of years or the death of the donor.
Advantages
• You can continue to receive income during your lifetime to meet personal living expenses while removing the asset from your estate for estate tax purposes.
• The charity receives the total amount in the trust at the end of the designated term.
• In the year the gift is made to the trust, a charitable deduction is available to the donor.
• If appreciated assets are used to fund the trust, any capital gain tax that would have been due upon the sale of the asset is avoided.
Disadvantages
• Contributing to a charitable remainder trust is an irrevocable gift.
• The asset will not be available to you or to any of your heirs in the future.
• You will be required to create a trust document, which may incur costs.
Charitable Gift Annuity
Similar to a charitable remainder trust, you make a gift to a charity and receive a stream of income for your lifetime. A contractual agreement is made between you and the charity obliging the charity to pay a specific amount to you each year. The charity holds your gift in a special investment account to produce your income steam and will be available to use for the purpose that you designate upon the death of the annuitant(s).
Advantages
• You maintain a constant stream of income for your lifetime.
• You receive a charitable deduction in the year the gift annuity is established.
• If you transfer appreciated assets, you avoid the capital gain tax that would be incurred if you sold the asset.
• The charity provides the gift annuity document; therefore, you incur no costs for creating a document and the process is simpler and quicker to establish than the trust alternative.
Disadvantages
• The charity has an obligation to you until your death. However, the charity is not required to set aside funds for the annual payments. The annual payments can come from any source available to the charity. Most charities do dedicate a funding source for their gift annuities. Regardless, if the charity goes bankrupt, your payments may stop.
• The asset exchanged for the gift annuity is not available for your heirs.
Planning
The biggest decision to making a planned gift is the concern that you cannot afford to give up the assets. Prior to making such a gift, do your own assessment or work with your financial advisor to assure that your resources are sufficient to meet your needs and those of your family.
Making a planned gift to charity, whether it’s an outright, expectancy or deferred gift, does take some planning. Once you are comfortable that you can make a large gift, it’s important that you use the method or vehicle that will allow you to meet your personal needs as well as your desired result for charity.
For more information, please contact Janet McCully, Director of Development, at (317) 274-4293 or jmccully [at] iupui [dot] edu.
