Planned Giving: A Win-Win Situation


What is planned giving?

A well thought-out planned giving program— when giving is integrated as part of an overall financial and estate plan—should offer the same amount of variety as the menu at your family’s favorite restaurant. Young donors will probably want something different than their older friends, and donors with modest means may want different options than those with large estates. A good planned giving program can be adapted to meet each person’s charitable and future financial goals.

Planned giving is a thoughtful and strategic approach to giving that helps nonprofit organizations while advancing a person’s own financial and personal objectives.

“Planned giving allows donors to provide greater support to the charities they care about most,” explains Jean Vukas Roberts, vice president of development for the Minnesota Community Foundation and The Saint Paul Foundation. “It encompasses any charitable giving that requires thoughtful planning either because of the timing, the complexity, or the size of the gift.”

A planned gift can be made with almost anything: cash, stocks, bonds, mutual funds, real estate—even property/collectibles such as artwork and books.

Why do people give?

The reasons people give are as varied as the individuals themselves. Donating can be an excellent income or estate tax planning strategy, providing tax benefits and/or income for life. Some give because they want to join with others for the common good or call attention to an issue. Some want to improve the quality of life for future generations.

Planned giving encourages the planning process and benefits all who are concerned by providing valuable information, encouraging visits to professional advisors, and promoting action. Family values can be transferred along with the transfer of wealth, creating a new generation of donors.

For example, generous grandparents can teach their children and grandchildren about organizations that matter to them, the family can become involved as income recipients of various deferred gift plans, and some family members may find inspiration through an endowment fund bearing the name of a loved one.


The Benefits of Community Foundations

Families, businesses, and individuals create personal and lasting charitable legacies through community foundations, which are tax-exempt public charities. A foundation streamlines the process, enabling people with philanthropic interests to easily and effectively support the issues they care about—immediately or through a charitable bequest. Donating through a foundation offers tax advantages, simplicity, and planning expertise. They exist for everyone, created by and for local residents, says Vukas Roberts of the Minnesota Community and Saint Paul Foundations.

“We see people from all income levels making philanthropy a priority in their financial plans,” she comments.

The Minneapolis Foundation, another community foundation option, has been connecting individual donors with nonprofits for decades. According to their website, “We offer customized assistance with mission clarification, fund development, community outreach, issue research, grant guidelines, and evaluation—supporting the full range of activities that comprise an effective and rewarding giving program. Our clients range from established family foundations to venture philanthropists, emerging community funds to major corporations.”

A private foundation—like those established through financial services companies—act as their own corporation, with one primary financial source (community foundations are designed to accept gifts from many sources). A private foundation is only required to distribute 5 percent of its asset value per year to charity. Therefore, the IRS has to establish limits on how much of a charitable deduction can be used in any particular year. Not so with a community foundation.

“Because a community foundation is a public charity, donors receive maximum financial benefits allowable by law,” Vukas Roberts explains.

Other benefits of community foundations include no out-of-pocket costs to establish or maintain a fund, and the option of creating a fund for as little as $5,000.

“Practically speaking, you need a minimum corpus of $10 million to operate a private foundation,” explains Chris Andersen, executive director/president of the Lutheran Community Foundation, a national faith-based community foundation located in Minneapolis. The community served by the Foundation represents the common values and beliefs of Lutherans, but extends beyond the Lutheran community to include public charities anywhere, and people of any faith tradition who want to leave a legacy. “We have the flexibility that allows people to give according to their interests and values. Another reason people come to our organization is because they can give independently according to family values and interests, yet come together as a collective voice in the community.”

Another benefit of a community foundation is privacy. Private foundations are required to file detailed tax returns on grants issued, investment fees, trustee fees, staff salaries, asset size, etc. and then publish a notice to the public that the tax return is available for public viewing.


Building a Better Future

Donors who support nonprofit organizations help to build a better future for everyone. Through their generosity, organizations such as Big Brothers Big Sisters and United Way continue to survive and thrive.

The nonprofit organization of Big Brothers Big Sisters of the Greater Twin Cities builds young people’s lives through lasting relationships with mentors.

“Each year, we serve thousands of children in Minnesota, and we provide each child with a caring volunteer mentor. A donation helps us recruit mentors for those children waiting for one,” says Martin Conover, vice president of development for Big Brothers Big Sisters of the Greater Twin Cities.

The success of the organization is dependent on a process that professionally screens, interviews, matches, and monitors the youth (ages 6 to 18) and the mentors in the program.

“Because training is essential to the success and safety of our mentoring relationships, donations provide instructors and instructional materials during our professional training sessions,” Conover says.

Donations also support education and enrichment programs for Little Brothers and Sisters, such as the Mentoring Children of Prisoners Program, created to mentor children with a close relative (such as a grandparent, parent, or sibling) in the corrections system.

“In a national study, 70 percent of prisoners surveyed reported that they had a parent or other significant relative who also had been incarcerated, which indicates that children of prisoners have a significant chance of ending up in the system,” he says. “By pairing youth with these mentors, at a cost of $1,400 a year, we’re saving the state, taxpayers, and society more than $30,000 a year, the approximate cost of keeping a youth in the corrections system.”
Greater Twin Cities United Way is also reliant on the generosity of donors who make planned gifts. Donors may use bequests, charitable remainder trusts, annuities, or other planned gifts to make a meaningful impact on their programming and community.

“We’re working to produce measurable change through our Agenda for Lasting Change,” says Randi Yoder, senior vice president of donor relations at United Way. “With our community partners, we are attacking the communities most challenging problems: reducing hunger, improving the financial stability of families, increasing access to health care, helping children succeed in school, and nurturing children and families. Planned gifts help us achieve those goals.”

Planned gifts to the Greater Twin Cities United Way typically are typically invested in their endowment. “An endowment is a great asset to a nonprofit, because it produces income we can plan on every year,” Yoder comments.
“A planned gift gives our donors an opportunity leave a legacy to the community,” she says. “It’s a gift that keeps on giving in perpetuity, helping those that need it most.”


Tools for Giving

One way a person can give is by creating a Donor Advised Fund, or charitable giving account offered by sponsoring charities. A Donor Advised Fund is designed as an accessible, simple, and less expensive alternative to private foundations. Donor Advised Funds allow donors to contribute stocks, cash, bonds, mutual funds or other appreciated assets, receive their charitable deduction, and recommend how the money is distributed. The sponsoring charity then does the record-keeping and due diligence, and, unlike private foundations, can protect a donor’s identity if that is requested.

The costs associated with Donor Advised Funds are so low that 99 percent of the dollars contributed go to charity. Today, more than 100,000 Americans use Donor Advised Funds. Corporations use these funds to streamline their giving, and they’re a beautiful thing to the nonprofits in that these sometimes small start-up organizations don’t have to accept securities as contributions, they simply receive a check instead.

“Donor Advised Funds provide simple, flexible, efficient ways for a person to manage their charitable giving,” explains Bruce Helmer, president and founder of Wealth Enhancement Group. “They provide an immediate tax advantage, allow a person to make grants on a flexible timetable, build a charitable legacy, and increase the value of the account for future grant-making. Since the maximum tax deduction is received by the donor at the time of the gift, the foundation administering the fund gains full control over future contributions, but still grant the donor advisory status.”

Charitable giving trusts are also very effective giving tools, according to Helmer.

“If a person has a highly appreciated asset, such as real estate or securities, and the sale of that asset would trigger a significant capital gains tax liability, the owner of that highly appreciated asset can place it into a charitable trust. Then, the trust can sell the asset rather than the owner. Whatever remains in the trust upon the trust-holder’s death will go to a charity or charities of the trust-holder’s choice.”

In exchange for this future gift to charity, the owner (trust-holder) avoids paying the capital gains tax at the time of the sale and receives a present-day tax deduction for the future gift they will make to charity. In this way, the donor ends up with a greater income stream from the proceeds of the sale of the asset because they did not have to reduce it for tax liability purposes.

A New Way to Give During the Holidays

Some families are changing how they celebrate the holidays and giving to charities instead of exchanging gifts. With nearly 2 million American charities and countless international charities, though, how does a person know where to contribute?

In order to determine if a charity is “good,” a potential donor should ask that particular charity for their IRS Form 990, “Return of Organization Exempt From Income Tax.” The form gives information about the organization’s finances and how money is spent.

Once you feel comfortable donating to that charity (or multiple charities), it’s important to remember you can receive a tax deduction if you itemize your cash donations or other gifts (stocks, goods, etc.) and the charity has the proper Internal Revenue Service status. Other tax deduction tips:

➤ You may deduct up to 50 percent of your adjusted gross income in one year for all charitable donations (certain contributions, though, may have lower limits).

➤ If you give more than 50 percent, you can carry the excess forward for up to five years.

➤ If you donate goods to an organization, they must be in good condition (or better) in order to be deductible. If it’s worth $500, you have to get a professional appraisal to approve its value.

The bottom line? Planned giving is especially important in these tough economic times, and just about anyone can give.

“Giving has less to do with wealth than attitude and the desire to give back to the community,” says Andersen of the Lutheran Community Foundation. “A thoughtful gift through a Donor Advised Fund is affordable to most everyone.”

Types of Planned Gifts

➤  Bequest — When a donor decides to leave assets to charity in her will, she is making a bequest. The donor’s estate will receive a charitable estate tax deduction at her death, when the gift is made to charity.

➤ Gift Annuity — A gift annuity is a contract between a charity and a donor. In return for a donation of cash or other assets, the charity agrees to pay a fixed payment for life to the donor or to a friend or family member of the donor’s choosing. The donor also can claim a charitable tax deduction. If a donor funds a gift annuity with long-term capital gain property, the donor will have to report only some of the gain, and may be able to report it in installments a over many years.

Income from a gift annuity can be deferred for a period of years. Deferred gift annuities are often set up by younger donors to supplement retirement income.

➤ Pooled Income Fund — The name describes this planned gift well– a charity accepts gifts from many donors into a fund and distributes the income of the fund to each donor or recipient of the donor’s choosing. Each income recipient receives income in proportion to his or her share of the fund. For making a gift to a pooled fund, a donor receives a charitable income tax deduction and will not have to pay capital gains tax if the gift is of appreciated property. When an income beneficiary dies, the charity receives the donor’s portion of the fund.

➤ Charitable Remainder Trust — This trust makes payments, either a fixed amount (annuity trust) or a percentage of trust principal (unitrust), to whomever the donor chooses to receive income. The donor may claim a charitable income tax deduction and may not have to pay any capital gains tax if the gift is of appreciated property. At the end of the trust term, the charity receives whatever amount is left in the trust.

Charitable remainder unitrusts provide some flexibility in the distribution of income, and thus can be helpful in retirement planning.

➤ Charitable Lead Trust — This trust makes payments, either a fixed amount (annuity trust) or a percentage of trust principal (unitrust), to charity during its term. At the end of the trust term, the principal can either go back to the donor (a grantor lead trust) or to heirs named by the donor (a non-grantor lead trust). The donor may claim a charitable income tax deduction for funding a grantor lead trust or a charitable gift tax deduction for funding a non-grantor lead trust. Since lead trusts are typically used to pass assets to heirs, non-grantor lead trusts are far more common than grantor lead trusts.

➤ Retained Life Estate — A donor may make a gift of his personal residence or farm to charity and retain the right to live there for the remainder of his or her life. The donor receives an immediate income tax deduction for the gift. At the donor’s death, the charity can use or sell the property.