Planned Giving Guide

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PUTTING THE PIECES TOGETHER

Most of the time we give to charity because, and when, we're asked. It's "checkbook charity," and it's vital to philanthropy. But we are increasingly urged to think in the long term as well, to plan our giving so that it reaches into the future. The urging comes not only from charities, but from tax accountants, financial advisors, and lawyers. All are eager to point out that with planning, we can not only make significant gifts to charity but also benefit ourselves financially.

If until now you've paid little attention, hardly heeding the brochures, radio and TV announcements that promote planned gift arrangements, maybe this is the moment to take a good look. When better than at tax time, when our thinking focuses, in one way or another, on how we have used the money we have? How we're going to use it in the future can't be far from our minds.

You'll find below an overview of the most common giving "instruments," as they're rather grandly termed, along with Internet addresses of sites that offer both information and food for thought, and the Alliance's suggestions for issues to keep in mind. Because there is so much to consider—facts, figures, your family and your own values—you may feel you are facing a daunting challenge and perhaps, at times, a puzzle. You'll want to talk with people you trust and confer with your financial advisor. But as you start, we hope we can help you pick out some of the pieces you'll need to create your own plan for giving.

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THE PLAN

First, a definition. Planned or deferred giving is a commitment made now to make a gift to a charitable organization in the future, either during your lifetime or through your will. The gift may be conveyed through bequests, gift annuities, and charitable trusts of various kinds. The term may also be used in connection with donor-advised funds and private foundations, among others. The assets conveyed to the charity are often in forms other than cash: stocks and bonds, marketable real estate, life insurance policies, retirement funds and the like.

Favorable tax treatment, for you and perhaps your heirs, is a good reason for considering planned giving. The Internal Revenue Service smiles on it, offering deductions or reductions in income taxes, capital gains taxes, and estate taxes when charitable contributions are involved—and IRS regulations are followed. Advisors point out that with knowledge and good advice, you are likely to find that favorable tax treatment enables you to make a bigger charitable gift than you might have thought possible.

The essence of planned giving, though, is that it is giving. There's much touting of the accompanying personal benefits, but you're not going to end up with more than you started with, 'at least financially. The gift aspect has been important from the start. The first charitable gift annuity was offered by the American Bible Society in 1843, long before estate or income taxes, and studies repeatedly show that charitable intent, not tax escape, is the primary motive for planned giving.

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BEQUESTS

Of the various ways people arrange charitable gifts for the future, bequests are simplest and, understandably, most common.

Including a charity or charities as beneficiaries in your will does not bring you the present tax benefit that other forms of planned giving can do, but your charitable bequests can reduce any estate taxes your heirs may face. And while there are limits on the charitable deductions that you can take for federal income tax purposes, there are no limits to the amount of wealth that can go to charitable purposes through an estate.

To ease your way, many charities provide sample bequest language in their printed materials or on their websites: "I give and bequeath to [exact legal name of charity], of [city and state] (insert dollar amount, percentage of estate, or description of securities or properly, etc.) to be used for its general purposes (or insert the name of a program)...." An inexact name, if it's similar to that of two or more charities, can raise questions about which one you intended to benefit and at times even engender lawsuits among them. Charities sometimes change their names, too, or move. Including the address aids your executor in locating them later if necessary. 

You'll find that charities generally prefer that bequests be given to support the general purposes of the organization, rather than for restricted ones. If you want to restrict the use of your bequest to a certain program of the charity, it's wise to discuss it with the group.

Researchers tell us that one in five people who include charities in their wills have no previous connections with those charities, including making gifts to them. Let's hope those bequests are made with knowledge of the charities' present financial health, among other things. A charity with a substantial deficit right now, for example, may not be around to welcome your bequest—and a current gift might in fact be more helpful. Be knowledgeable about the charities you include in your will.

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CHARITABLE GIFT ANNUITIES

Gift annuities are the most commonly used form of planned giving, after bequests. Through a contract with a charity, your gift of cash or other assets (generally a minimum of $5,000 or S10,000) entitles you, and/or a person you name, to fixed payments each year for life. What's left of the gift after the death of the annuitant remains with the charity.

The regular income offered by this form of planned giving makes it particularly attractive to older people, and in fact there is often a minimum age for participation. Also attractive is the current tax deduction you receive, in an amount based on your age at the time of the gift, the amount you gave, and the income you'll receive. Part of that income will be tax free because it's your own money that you're getting back. Some charities also offer deferred gift annuities, where income payments to the donor or named beneficiary do not start until a specified date at least a year after the gift is made.

How much would you earn? Less than from commercial annuities, because a gift annuity gets you a tax deduction as well as income. But if you are interested in a charitable annuity, it's not hard to get an estimate of how much annual income you could expect and how it  would be taxed. The Web can give you a good idea. The website of the Humane Society of the United States, for example, allows you to learn, anonymously, that a gift of $30,000 on January 9, 2004, from a 65-year old, would bring total payments each year of $1,800, or a payout rate of 6% of the $30,000 gift, to that donor or the donor's named beneficiary. (It's been noted that because rates are the same for men and women, they benefit women, who generally live longer.) The charitable deduction that could be applied to the donor's income tax when the gift was made would be $9,330. Of the $1,800 annuity payments, $1,039 would be tax free and $761 taxed as ordinary income. If you were 55 when you made the gift, the payout rate would be 5.5%; if you were 75, it would be 7.1%.

Though the kind of property donated, the length of the payout term and other factors can affect your actual results, you'd be likely to get similar estimated figures from other charities (you would certainly want to check), because most use payout rates suggested by the American Council on Gift Annuities (ACGA). The rates change periodically, depending on a slew of factors subjected to complex financial formulas. Such rates have been published since 1927, when the ACGA was founded in pan to counteract the sorry tendency of some charities to compete with one another by offering "better" rates. Not only did this practice tempt charities into ever-riskier investments that could threaten their survival, it played to donors' greed rather than their charitable impulse. ACGA rates aim to allow charities to retain at least 50% of the original gift at the annuitant's death.

What the payout and tax calculations you get online don't tell you, of course, is the right amount for you to give, or the most effective form for your gift—whether in stocks or cash, for example. Matters like these should be taken up with professionals—knowledgeable people who can help you look at your assets and financial needs to determine the course appropriate for you.

How does a charitable annuity differ from a commercial one? Can I be sure that the charity I'm contracting with will keep up my payments?

Charitable gift annuities are backed only by the general assets of the charity. Because of the tax benefit, they are not insurance, and charities that offer them are not subject to federal regulations that apply to companies that sell commercial annuities.

Charities' exemption from those regulations, on the basis that making a donation, not an investment, is the aim of a charitable gift annuity, is in the Philanthropy Protection Act of 1995. That act does require, however, that the charity issuing the annuity provide you with certain disclosures. A sample disclosure form is at www.acga-web.org, among other sites. Most regulation of charitable annuities is at the state level, where it runs from non-existent to stringent. You can access the up-to-date regulations (or see where they don't exist) at several of the websites cited on page 6. State requirements tend to focus on the age of the charity, the kinds of assets that may be contributed to it (New York allows only cash and/or negotiable securities, for example, not real estate), the kinds of investments the charities can make, and the level of reserves they must have. You or your advisor will need to check whether there are applicable requirements in both your state of residence and the state where the contracting charity is located. 

But on the whole, say the ACGA and the National Committee on Planned Giving (NCPG), defaults on charitable annuities have been few. Most common abuses, according to a California Senate Hearing Committee, are in failure to comply with state laws and in paying commissions for the sale of charitable gift annuities. Still, there's an occasional sad scandal. In 2001 a charity in Arizona suddenly shut down, leaving holders of its annuities—and the charities that expected to benefit from them—in the lurch. A federal grand jury has since indicted the charity's former head, alleging that he had not invested the money given for annuities but diverted it to his personal use.

Though trouble rarely trumpets its arrival, some annuity offers should raise suspicion. Donors should be just as wary of pressure when they are being urged to take an annuity contract as when a telemarketer wants to send a runner to pick up their contribution. The North American Securities Administrators Association, while stating that most annuities offered by charities are legitimate, warns that "investors should be cautious of little-known organizations or those that provide only sketchy information." You may well want to ask a charity about the management of its gift annuity program, including who runs it and what kind of investments it makes. "Donors have to be very savvy consumers, even as it relates to charitable giving," says Debra Ashton, author of The Complete Guide to Planned Giving (Ashton Associates).

The payment of commissions to annuity sales people is particularly problematic, as it often leads to pressured promotion and blurs the line between the commercial and the charitable. Paying commissions to those who market gift annuities is uncommon among charities and frowned upon by the ACGA and NCPG, which take the position that paying such commissions may make charities subject to the stiffer governmental regulations that apply to companies that sell commercial annuities.

As they do with any contribution, thoughtful donors will want to check that the charity benefited by their annuity agreement is viable, reputable, creditable, and reliable, and that it has a solid history both financially and in delivering its programs and services.

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CHARITABLE TRUSTS

If you have in mind a very substantial gift and are looking for more "custom design" in your planned giving than gift annuities offer, a charitable trust might suit you. In contrast to a gift annuity, where your gift is made directly to the charity offering the annuity, a charitable trust does not exist until you set it up, with your assets.

After formation of a trust, specified distributions are made to a chosen party or parties over the trust's term (life or a specified period), and at the end of the term other parties receive the remaining assets. The parties will include one or more charities as recipients of either the distributions or the remaining assets, depending on the type of trust. A bank or trust company, a charity, or the donor can be the trustee responsible for managing the trust, investing its assets and making the income payments. With professional counsel, you can determine the structural details that suit you and be certain that your trust meets requirements of the Internal Revenue Service.

Charitable trusts can have many individual features. Broadly, they differ in 1) whether a donor or a charity receives the distributions and 2) how the distributions to beneficiaries are calculated.

Stated simply, under a charitable remainder trust, income payments are made to the donor or designated beneficiary for life or a specified term, after which a charity or charities receive the remaining assets. The donor receives an immediate tax deduction for the value of the remainder interest that goes to the charity when the trust terminates.

With a charitable lead trust, a charity or charities receive a set amount for a specified period, after which the remaining trust assets are distributed to the donor or any other specified person or persons, typically the donor's heirs. The donor receives a tax deduction for the value of the regular payments to the charity (though may still be liable for tax on the income earned by the trust) but retains the ability to pass on most of the assets.

Both remainder and lead trusts can be structured so that the payout is a fixed regular amount from year to year (annuity trust) or a percentage of the trust's assets based on an annual valuation (unitrust). In the unitrust, the income can vary year to year.

One factor that can influence whether a donor chooses an annuity trust or a unitrust is age. An elderly person might choose the dependable income in fixed dollar amounts; though inflation would over time decrease the value of the income payments, it would likely have little effect over a short term. For a younger person, contemplating income over many years, a payment based on regular re-valuation of the assets may be more attractive. Charitable trusts offer enormous opportunity for inventiveness, but creativity must not trump legality. Informed professional advice is essential.

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POOLED INCOME FUNDS

Individuals who want to make smaller gifts than might be appropriate for charitable gift annuities may find pooled income funds attractive. The donor's gift is combined with those of others in a pool that operates like a mutual fund and is controlled by a charity. The donor or designated beneficiary then receives regular income for life, based on the proportion of the individual gift to the value of the whole pool at the time the gift is made. At death, the individual donor's share of the assets in the pool goes to the charity. The donor receives an immediate tax deduction, based on the value of the remainder interest, at the time funds are contributed to the pool.

AND MORE…

Donor-advised funds, private foundations, retained life estates, supporting organizations—these are among the other kinds of giving that may suit your aims and means. Your financial advisors can provide more information.


A SPECIAL NOTE ON CONTRIBUTING APPRECIATED PROPERTY

You have likely heard even in charities' radio and TV announcements (how sophisticated we have grown!) that gifts of appreciated property, held for a year or longer, can offer special advantages. You may be able to avoid or defer the capital gains tax that would be assessed on the sale of that asset, all while helping a charity. Gifts of property need not be part of planned giving, but often are.

THE GIFT

We can't advise you on the form of planned giving that will best suit you. There are professionals galore who can give you counsel. And you'll be justifiably pleased when you complete an arrangement that treats you well, income- and tax-wise. What we can do is urge you to exercise both your heart and mind in choosing the charity or charities you want to benefit. The questions you might ask are personal and practical.

What charitable "cause" matters deeply to me?

In the framework of planned giving, when you may be making substantial financial commitments as well as irrevocable decisions, you want to be certain that the charity you support reflects what you really care about. Taking the time to think about the causes most meaningful to you, and how they became so, can help make your gift truly fulfilling.

What do I want to accomplish through my gift?

Even if you start with a particular "cause" in mind, it may be that there are several organizations working in the field, but with different tools or approaches. Familiarize yourself with the work of the organizations you are considering.

Can the charity that interests me handle the type of gift instrument from considering?

Because not all charities have the resources to offer the more sophisticated arrangements, you'll need to check with the planned giving officer at the charity you choose and confer with your financial advisor about how to best structure your deferred gift for your particular situation.

If a charity won't benefit from my gift until some years from now, how can I be sure it will be there?

No future is guaranteed, but it's wise to check out not only the financial condition of those charities that interest you, but their governance and accountability. Evaluative reports from the BBB Wise Giving Alliance or local Better Business Bureaus can often provide helpful information.

No matter what kind of planned giving arrangement you consider, share your thinking with your family and any others affected by your plans. Charles W. Collier, senior philanthropic advisor at Harvard University, says, "The human impact of your decisions, no matter what the size of your estate, deserves at least as much thought as the management of investments or minimizing estate taxes." He advises "more openness, earlier than later," if you're not sure about how much to tell your children and when to involve them.

Thinking through these questions, while at the same time juggling the technical pros and cons of various financial agreements, takes time and concentration. But the "planning" of planned giving, all the exploration that goes into it, can be a gift in itself. If you have sought out good information and counsel, have reflected on your own and your family's financial needs, and have considered deeply the charitable work you want to support, the giving decisions you make will surely bring you enduring satisfaction.