Major and Endowment Gift Options
In times of financial and economic uncertainty, a number of charitable gift options available to donors are particularly appealing. Of course, not all gift options are appropriate for all donors.
1. Appreciated Assets
Even when the market is down, donors may have stocks or mutual funds that are worth more than they originally paid for them. In such a circumstance, the donor may want to consider transferring some of those appreciated investments to your endowment. By giving the securities directly to your nonprofit organization, rather than selling them and donating the cash from the sale, the donor can avoid paying capital gains taxes. Plus, if the donor has held the donated securities for a year or more, the income tax deduction will be based on the appreciated fair market value at the time of the donation.
2. Depreciated Assets
If, on the other hand, the donor has stock or other assets that are worth less than the amount paid, the donor should 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 (many?) donors will still elect to make a cash gift even if market conditions have dimmed their fortunes. After all, their support is needed now more than ever and they may prefer to devote their assets to good works today, rather than risk further declines in the market. The CARES Act allows donors to deduct up to 100% of their adjusted gross income for cash gifts to charitable organizations in the year 2020. A donor could effectively eliminate their entire federal tax burden with such a gift.
4. 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 income portion from an endowment gift for a designated number of years. When economic circumstances improve, they will then make a leadership gift to the endowment. See Flexible Endowments [at www.benefactorgroup.com] for more information about how this can work for you.
5. Bequests by Will or Trust.
The bequest market is stronger now than in the past, especially for those 65 and older who no longer have liquid assets or are not comfortable giving assets that may generate earnings during their retirement years. They may not be willing or able to make a significant gift now, but they can commit the gift now through their wills. Many older people receive a great sense of satisfaction from such a gift and they can receive thanks and recognition during their lifetimes.
Donors have the option of making a bequest commitment with a “pre-pay” option. When the market hits a pre-determined index, the donor fulfills the bequest with a cash gift. Alternatively, donors may make a written pledge for a specific pledge to be paid during their lifetime, with any pledge balance remaining at the donors’ death to be paid in full by bequest.
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 at the time of death) and the name of the endowment fund or other fund to which the donor’s gift should be allocated. Of course, the donor may change the beneficiary at any time during their lifetime. The large majority of donors, however, do not change beneficiaries once they are made—especially when that donor is carefully stewarded by the organization.
6. Charitable Lead Trust
A charitable lead trust (CLT) is a “split interest trust,” which simply means that two different entities have an interest in it. A CLT initially pays a defined amount of income each year to one or more charitable organizations. These payments are generally made for a defined 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 an 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 an income tax savings. In today’s low interest rate environment, CLTs produce very large tax deductions.
7. 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. The donor receives a current income tax deduction for a portion of the gift. A donor can make the contribution and direct the payments to her- or himself. Alternatively, the donor can direct that the payments be made to someone else (e.g., a parent or sibling).
Gift annuity payments can begin immediately after the contribution or begin on a future date, which is called a deferred-payment gift annuity. The longer the annuitant waits to start payments, the larger they will be. 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. Gift annuity rates are recommended by the American Council on Gift Annuities to provide both a fair payment to the donor and a generous gift to the charity. In the current low interest rate 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 greater 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.
8. Retirement Plan Beneficiary Designation
Many people have seen the value of their Individual Retirement Accounts (IRAs) and other qualified retirement plans swing widely in value over recent months. Even with this, retirement plans are often the largest or second largest asset in many people’s estates. 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 have to pay any of those taxes.
9. IRA Qualified Charitable Distributions
Individuals over the age of 70½ can make tax-free distributions (not to exceed $100,000) from their IRAs directly to qualified charities. While recent legislation has suspended required minimum distributions from IRAs due to current economic challenges, donors still may find this charitable option of benefit for current and future giving.
10. Life Insurance
Donors may make gifts of paid-up life insurance policies to your organization 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 the use of the fund’s distributions.
11. Gift of Real Estate
For donors with significant real estate holdings with substantial capital gains, several strategies can create tax savings and life income streams. An outright gift of real estate will provide income tax savings, shelter the donor from the capital gains tax, and produce estate tax savings. A Charitable Remainder Trust will provide similar tax savings and an income stream to the donor and spouse (or other beneficiaries).
12. Market-Based Pledge
In some cases, 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 she/he wants 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 a good 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 Joseph O. Bull, friend of the Firm, Principal with Philanthropy Advisory Counsel, and President-elect of the American Council on Gift Annuities.
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 his or her 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; we’d be happy to discuss your situation.
Benefactor Group 614.437.3000