Are you thinking of leaving a part of your legacy to a nonprofit or charitable organization, whose causes you’re passionate about? Are you looking for ways to reduce taxes on your estate? Why not both? Keep reading to find out how planned giving is a popular tool leveraged amongst those setting up their estate plan, and what types of planned giving options are available to you.
What is Planned Giving?
Planned giving is the process of creating a gift as a part of an estate plan. A donor will arrange for their donation, to be made through their Will or Trust, upon their passing. A planned gift can be of any size, although they are typically sizable.
Gifts are charitable in nature, and are often given to charities and other types of nonprofit organizations. Other names used alongside planned giving include gift planning and legacy giving.
What is a Gift?
A gift describes the actual asset or property that is given by a donor through their estate plan. There are many different types of planned gifts, such as a lump sum of cash or a piece of art. Once the donor passes away, the executor of their estate will ensure that the gift is provided to the charitable organization per the instructions that are in either the donor’s Trust or Will. Donors often choose to leave planned gifts to take advantage of tax benefits.
In the next sections, we’ll reveal some of the types of planned gifts you can make, followed by a discussion on the tax benefits associated with planned giving.
Types of Planned Gifts
When someone says “gift,” the automatic association is a simple cash donation in the form of a check to a nonprofit. Although this is a completely legitimate type of planned gift, the truth is, there are many different types of planned gifts that can be made. Here, we’ve outlined several for you to get to know and consider.
Bequest
A bequest is the most common type of planned gift. It’s included in a Will or a Trust, and is typically a set dollar amount, rather than property. Alternatively, it could be a percentage based on the value of the estate at the time of the donor’s death.
According to plannedgiving.com, the average bequest made in the U.S. is roughly $40,000 to $60,000, but can go much higher. To make a bequest, you can simply state “I bequest [dollar amount] to [recipient’s name]” in your Trust or Will.
A bequest can be made to a charitable organization, or any individual of your choosing, such as a family member. We go into great detail about everything you need to know about bequests here.
Appreciated Securities
If you have any securities in your asset mix, know that it’s possible to gift them as a donation. A security is a tradable financial asset, with the most common examples including stocks, bonds, and options. For example, if you have any stocks that are appreciated in value, you can donate them to a charity of your choosing.
The nonprofit can then sell the stocks and keep the proceeds, after which they can apply to any cause or purpose needed. As the donor, any tax deductions are based on the fair market value of the securities.
Life Insurance
When setting up a life insurance policy, the policy-holding company will ask you to make a beneficiary designation. The beneficiary is the individual or entity who will receive your life insurance policy proceeds in the event of your death.
You might choose a direct family member as your beneficiary, but you can also designate a charity or nonprofit. Upon your passing, they would receive the policy benefits. This can be quite a sizable and generous gift to the cause of your choosing. Your heirs will also benefit from having an exemption on any estate taxes that might be owed.
Real Estate
It might not occur to you to leave a piece of property to a nonprofit, but it’s done all the time. As a part of your estate plan, you can choose to give real estate to a charity or nonprofit. They might want to sell the property, or they may even want to keep it for use. This equates to a sizable deduction in the total taxable value of the estate. The property value is appraised at its fair market value, and not at its original value at the time of purchase.
Personal Property
In 2014, Los Angeles billionaire Jerry Perenchio donated 47 pieces of artwork to the Los Angeles County Museum of Art. The art was valued at roughly $500 million, and included pieces by Monet.
This is one world-class, high-profile example of someone who bequeathed personal property to an organization. Do you have any collectible art, books, or jewelry? There are nonprofits and other organizations who would love to have them, either in terms of their market value, or as collectibles to showcase in their collections.
401k / IRA or Retirement Plan
You can also designate a nonprofit as the beneficiary of a retirement plan, such as a 401k or Individual Retirement Account (IRA). You don’t necessarily have to give all of your retirement savings away to charity if you don’t want to. Financial institutions typically allow you to designate multiple beneficiaries per account, with an indication of what percentage each beneficiary should receive.
When your estate is settled, the percentage you designated would be dispersed to the nonprofit. However, be careful to make sure that the beneficiaries indicated on your Trust or Will match the beneficiaries you designate directly with the institution that holds your retirement accounts. That’s because, in general, beneficiary designations override what’s included in a Will. We explain this in detail here.
Charitable IRA Rollover
A charitable IRA rollover is also referred to as a qualified charitable distribution (QCD.) IF you’re over the age of 70 ½, this tool allows you to make up to $100,000 in IRA charitable rollover gifts. This is an annual allowance, and the gifts are made directly from your individual retirement account to the nonprofit of your choosing. The key word to remember is “directly.” If you withdraw the funds first, and then donate them to charity, the amount will be taxable. To avoid taxation on the fund withdrawals, the funds have to be transferred directly from your IRA account to the charity’s account.
Charitable Gift Annuity
What if you wanted to donate securities to a charity, but wanted to benefit from the annuity payments during your lifetime? A charitable gift annuity makes this possible.
In this scenario, you would plan a gift in which a nonprofit would receive securities. However, during your lifetime, you can continue to receive the annuity payments from the securities to pay for expenses. Once the security reaches the end of its term, the nonprofit would receive the balance.
This is a great fit for those who want to make a planned gift, but still want to retain retirement income for now.
Charitable Remainder Unitrust
A charitable remainder unitrust is another great tool if you want to make a planned gift, but still want to receive some income from the said gift. A trust is set up with assets and securities, for which you can name yourself and a charitable organization as beneficiaries. The unitrust would then make payments to the beneficiaries. Once the unitrust terminates, the remaining balance goes directly to the nonprofit.
Charitable Lead Trust
A charitable lead trust works similarly to a charitable remainder unitrust, but in opposite order. A donor can set up a charitable lead trust and gift it to a nonprofit by designating it as a beneficiary. The lead trust pays the nonprofit or charity for a set term. Once the lead trust terminates, the remaining assets are transferred back to the donor, or other designated beneficiaries.
Pooled Income Fund
A pooled income fund (PIF) is a great option if you’re an “investor” type, but are also philanthropic in nature. A nonprofit will pool several donor gifts together into a single fund, which is then invested.
Each donor is paid a quarterly income based on their share of the fund. When a donor passes away, their share of the fund is received by the nonprofit.
Retained Life Estate
The beauty of planned giving is that you can arrange to make a gift at a later date, but still have personal use over that gift in the meantime. In the case of a retained life estate, you would transfer a property deed to the charity of your choosing, but would retain the right to live in or rent out the property. You can either set a term, or retain your rights for life.
By doing so, you receive an immediate tax deduction based on the stepped-up in basis value of the property. However, you still have to cover any property expenses, including maintenance costs, during your lifetime.
Tax Benefits of Planned Gifts
Gifts are associated with several tax benefits, which explains why planned giving has become such a popular aspect of estate planning. On one hand, you get to support a cause that you care for. On the other, you receive tax benefits. It’s a win-win for everyone involved.
By making a planned gift, you are lowering your total taxable estate and thus helps to reduce income tax, capital gains tax, and estate tax. Visit our guide that breaks down the different types of taxes that can affect an inheritance.
Preserve Your Legacy by Planned Giving
Planned giving is a powerful tool that can help you preserve your legacy. For starters, you are sending a message by supporting a cause you care about, and impacting an organization in a positive way. You can feel so proud for that in itself, knowing that a part of your legacy contributed to positive change in the world. In addition, planned giving is a creative solution that will help you lower the total taxable amount of your estate. Although it’s not necessarily the right choice for all individuals, many find that it’s a great way to help protect the legacy that they want to pass on to loved ones. There are many different types of planned giving available, so it’s easy to find an option that fits your personal circumstances.
You can start planning your gifts by setting up an estate plan. Ready to get started? Take the quiz to find out what type of estate plan is best for you.
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