8 Ways To Make A Planned Gift

by William J. Moran, J.D., M.S.Ed.

1.  Will or Trust

Gifts from one’s will or revocable trusts constitute a majority of planned gifts. A donor can make a charitable bequest by providing a dollar amount, specific property, a percentage of his or her estate, or what is left (remainder). If the donor is subject to estate taxes, a charitable deduction is allowed against those taxes. In many cases the charitable provision may be made by a simple codicil to the will which will not require rewriting the entire estate plan.

2.  Securities

Gifts of appreciated stock (including stock in closely held companies) may also be made. Gifts of long term appreciated stock (held more than one year) avoid capital gain taxes (Currently 15%) and their full fair market value is deductible as a charitable contribution from income taxes.

3.  Retirement Accounts and Pension Plans

Retirement account funds (IRA’s or company plans) may be transferred to a charity at death by proper beneficiary designation. If left to a child or other heir, these funds may be subject to double or triple taxation (federal estate, federal income, state death tax, state income) that may eliminate 70-80% of their benefit. However, a charity will receive 100% of the funds at no tax cost.

These gifts are simple to complete requiring only a change of beneficiary form. Donors should ask their financial advisors for more information.

4.  Life Insurance

Life insurance is another way to make a substantial future gift. The charity is named as the owner and beneficiary to receive the proceeds of an existing life or new insurance policy. The donor receives a tax deduction for approximately the cash surrender value.

An alternative is for the donor to simply add the charity as a beneficiary to a policy. The donor retains the incidents of ownership over the policy including the right to change the beneficiaries. However, the donor receives no income tax deduction.

5.  Charitable Remainder Trusts

Charitable remainder trusts pay lifetime income to donors and/or other named beneficiaries. Cash, appreciated stock, real estate or other property is transferred to the trust. The donor receives income back, a partial income tax deduction in the year of the gift, and avoidance of capital gains tax if long term appreciated property is contributed.

For an Unitrust, the payout is based upon a fixed percentage of the trust assets which are valued annually. Generally the allowed rate of return will be equivalent to reasonable income expected from a fixed income portfolio. (By law, a unitrust can not have more than a 50% maximum payout and not less than a 10% charitable remainder).

For an Annuity trust, the payout is a fixed dollar amount based upon the initial fair market value of the trust.

6.  Gift Annuity

Similar but different vehicle from pooled income fund or charitable remainder trusts.

  • A contract between the charity and the donor, whereby in return for the gift of principal, the charity promises to make fixed annuity payments back to the donor for life.
  • Rates are fixed and based upon age. The National Committee on Gift Annuities reviews these rates periodically.
  • Advantages:
    1. Fixed income, often at high rates
    2. Partial income tax deduction
    3. Payout to the donor is partially non-taxable
    4. Partial capital gains avoidance if funded with appreciated assets
    5. Removes assets from probate and estate taxes

Biggest advantage is that gift annuities are simple to execute and simple to understand.

7.  Real Estate

Gifts of long term appreciated real estate are important in planned giving because the donor gets a double tax benefit.

  1. Income tax deduction at fair market value.
  2. Avoidance of capital gains – (Generally 15%)
    • By contributing the property, the donor is relieved of management, taxes, insurance, and
      maintenance costs.
    • The deduction is limited to 30% of adjusted gross income with a five year carry over for any excess which exceeds the 30% ceiling.
    • It is possible to deed the property over in installments to take full advantage of the tax savings without exceeding the charitable deduction ceiling.

8. Real Estate Retaining Life Estate

This option enables the donor to transfer a gift of real estate, while continuing to live on the property and reap tax advantages:

  • The donor transfers his “remainder interest” of a personal residence or farm, but retains a life estate in the property. The donor continues to live on the property and is responsible for maintenance, taxes, etc. because he maintains a “life estate” in the property. Upon his death the property vests in the charity as “remainderman.”
  • Advantages:
    1. Gift is simple to execute (execution of real estate deed).
    2. Donor obtains a substantial income tax deduction in the year of the gift.