Major and Endowment Gift Options
In times of financial and economic uncertainty, several charitable gift options available to donors are particularly appealing. Of course, not all gifts are appropriate for all donors.
1. Appreciated Assets
Even though the market is down, donors may have assets that have grown in value given today’s inflation—such as second homes, investment properties, or collections. In such a circumstance, the donor may want to consider transferring some of those appreciated investments to your organization. In addition, the donor may realize significant tax benefits by giving directly, rather than selling the appreciated asset and donating the cash from the sale. Many donors are long term investors. As such, their portfolios still have significant gain despite the recent market downturn. They tend to focus on the recent market dip rather than considering their long-term investment gains. A careful discussion of this can help donors continue to harvest capital gains tax savings from gifts of stock that has appreciated significantly since the donor purchased it.
2. Retained Life Estate
This is another way for a donor to take advantage of highly appreciated property such as their personal home, second (or third) home, or farmland. The donor may be able to make a larger gift than they ever imagined—and realize tax benefits—while retaining the right to continue using the property for their lifetime.
3. Depreciated Assets
If, on the other hand, the donor has stock or other assets worth less than the amount paid, the donor may consider selling the asset and giving the proceeds of the sale rather than the asset itself. This enables the donor to take advantage of both the loss and the charitable contribution on their taxes.
That’s right. Some, even many, donors will still elect to make a cash gift even if market conditions have dimmed their fortunes. In fact, they may have moved assets out of equities and into cash as the market fluctuates. And their support is needed now more than ever; they may prefer to devote their assets to good works today rather than risk further declines in the market.
5. Intent to Give vs. Pledge
If you are in a campaign, you may find that donors are skittish about multi-year pledges right now. That’s to be expected. If the donor is considering a $500,000 pledge, ask them to make the first $100,000 “pledge payment” now, with an understanding that they’ll make future payments—and perhaps even sign a pledge—as the markets rebound. This might be affirmed in a written nonbinding “intent to give.”
6. Income Only Gift or “Virtual” Endowment
Donors who are interested in making a gift to endowment but are hesitant because of the current economic climate have the option of donating the equivalent of the draw portion from an endowment gift for a designated number of years—for example, a gift of $40,000 in lieu of funding a $1 million endowment. When circumstances improve, they may then make a leadership gift to the endowment.
7. Bequests by Will or Trust
The bequest market is strong, especially for those 65 and older who have fewer liquid assets or are not comfortable giving assets that may generate earnings during their retirement years. Many people receive great satisfaction from such a gift, and they can receive thanks and recognition during their lifetimes.
Bequests are the most common form of deferred gifts, accounting for approximately 80% of all planned gifts each year. In a will or trust, the donor should specify your organization as the beneficiary (of all or a portion of the assets) and the purpose of the gift. Of course, the donor may change the beneficiary at any time during their lifetime. However, the large majority of donors do not change beneficiaries once they are made—especially when the organization carefully stewards that donor.
8. Charitable Lead Trust
A CLT initially pays a defined amount of income each year to one or more charitable organizations. These payments are generally made for a specified number of years. At the end of this term of years, the trust’s principal is distributed to one or more persons. This can be viewed as a donor lending a sum to a charity for a period of years.
Who receives the CLT’s principal at the end of the term? It can be distributed to a donor’s children or grandchildren to generate estate tax savings. Given that only 0.1% of Americans now must pay estate taxes, many donors have the CLT principal returned to themselves. By doing this, the donor generates income tax savings. In a lower interest rate environment, CLTs produce substantial tax deductions.
9. Charitable Gift Annuity
A charitable gift annuity (CGA) is a contract under which a charitable organization, in exchange for cash or other property, agrees to pay a fixed sum of money for a period measured by one or two lives. In addition, the donor receives a current income tax deduction for a portion of the gift. A donor can make the contribution and receive the payments directly or have them made to someone else (e.g., a child or sibling).
The payment amount is fixed from the outset; it will neither increase nor decrease no matter what happens to interest rates or the stock market. That is a comfort to many people at this time. The payments are also backed by the full faith and credit of the issuing organization.
This type of gift arrangement is particularly appealing to donors concerned about income during retirement years. However, in the current environment, gift annuity rates are still considerably higher than CDs, US Savings Bonds, and other money market returns.
People who have already included the organization in their wills may be especially attracted to gift annuities. Why not make a higher income from dollars already committed to the charity? And the older the donor is when the charitable gift annuity is established, the higher the gift annuity rate. As you might expect, this frequently appeals to older donors.
10. Retirement Plan Beneficiary Designation
Many people have seen the value of their Individual Retirement Accounts (IRAs) and other retirement plans swing widely in value over recent months. Even with this, retirement plans are often the largest or second largest asset for many people. This makes them good assets to consider for a planned gift. They are also a very tax-wise gift as donors’ heirs will need to pay income tax on any distributions they receive (as well as possible federal and state estate taxes), but a charitable organization will not.
11. IRA Qualified Charitable Distributions
Individuals over the age of 70½ can make tax-free distributions (up to $100,000) from their IRAs directly to qualified charities, which may reduce the donor’s need to take minimum distributions that they may not need, and which could trigger higher income taxes.
12. Life Insurance
Donors may make gifts of paid-up life insurance policies and take a tax deduction (essentially cash surrender value). Or donors may make gifts of premium-due policies to the organization and then take tax deductions for gifts to the organization to pay the premiums.
Alternatively, the donor may choose to retain ownership of the policy and name the organization as the beneficiary of the policy at the donor’s death. In a written letter of agreement, the donor may direct your organization to add the policy proceeds to its endowment and may describe any restrictions on using the fund’s distributions.
And a bonus tactic!
Sometimes, donors are reluctant to give stock because they believe the value will increase substantially. For example, a donor has a stock asset currently valued at $7,000, but they want to wait until the price reaches a value of $12,000 before giving it to your organization. The donor provides your organization with a copy of a transfer order for confirmation. This gift cannot be counted as income, and any permanent recognition should be deferred until the gift is fulfilled. Despite these limitations, such a gift can be an excellent way to keep the donor invested in your institution.
This article is updated from a document released by Benefactor Group during the Great Recession. Special thanks to Joe Bull, Principal with Philanthropy Advisory Counsel and President of the American Council on Gift Annuities, for his expertise and insight.
Would you like to learn more about including these tactics in a comprehensive fundraising plan?We encourage you to discuss these options with your organization’s supporters. If you feel uncomfortable, you might invite a financial advisor or a representative of your local community foundation to join you. Whenever possible, meet with the donor’s own financial advisors, too. Regardless, every donor should consult their own independent financial advisor to determine the best strategies to meet both charitable and financial goals. Would you like to learn more about including these tactics in a comprehensive fundraising plan?
Please contact us below; we’d be happy to discuss your situation.