Planned gifts, also called legacy gifts or deferred gifts, come in all shapes and sizes.
Nonprofits can choose to offer simple planned giving vehicles (such as outright gifts… bequests, gifts of stock, etc.), to more structured giving vehicles that require an advisor or attorney (remainder unitrusts, lead trusts …). It is unnecessary for you to get into the details of these specific vehicles since interested donors normally rely on their own sources and advisors. Just know the basics. But if for some reason you do need details, visit our Planned Giving Wiki.
Below is a sampling of common gifting vehicles. After you review this page, take the Planned Giving I.Q.
The types of planned gifts on this page are divided into three groups:
Each gifting vehicle includes:
The videos on this page are available for sale. Use them to educate your donors while they are visiting your website.
A charitable bequest is a gift made through a will or a revocable trust, which takes effect after the donor’s death. It’s the most popular planned gift, the easiest to make, and it costs nothing during the donor’s lifetime.
A bequest can be included in a new will or revocable trust, or it can be added to an existing will or trust through a simple amendment — in the case of a will, this is called a “codicil” — often at minimal expense.
Typically, a charitable bequest is expressed as a set dollar amount or as a percentage of the “residuary” estate. The average charitable bequest in the U.S. is between $40K — $60K. Of course, we’ve seen much higher.
Related: Anatomy of a Bequest (An infographic you can use)
This plan can fit any prospect: single, married, childfree or multi-generational, wealthy or not.
Even a person of very modest means should have a will, if only to anticipate unforeseen circumstances such as property passing into the hands of a minor or incapacitated person. And if your donor wishes to leave a gift to your organization after their death, they will need a will or a revocable trust to accomplish this.
An exception is a beneficiary designation on a life insurance policy or retirement account, see the discussions under those headings elsewhere on this page, or a transfer on death designation on a bank or brokerage account. But in the typical case it will be better to make even those designations to a revocable trust, which can then function as the central vehicle for executing an orderly estate plan.
If your donor already has a will and/or a revocable trust in place, the expense of drafting a simple amendment to the trust and/or a codicil to the will need not be exorbitant. And it is a good idea to introduce the question of reviewing an existing estate plan from time to time to bring it current.
As your prospective donor ages, and especially if their family and/or social support structures have weakened, they may become vulnerable to
manipulation and exploitation. You do not want your organization to be seen as taking advantage.
If your donor is making significant changes to their existing estate plan, in part to benefit your organization, you will want to be certain they are receiving independent advice, and that their capacity to make these decisions is well documented.
Sometimes it will be advisable to engage the donor’s children and/or others who would otherwise benefit from their existing plan in conversations with the donor as part of the planning process.
Publicly traded securities that a donor has owned for more than a year and that have appreciated in value can be transferred to a tax exempt organization, which can then sell the securities and apply the proceeds to whatever charitable purpose the donor designates.
The donor gets an income tax charitable deduction for the fair market value of the donated securities while also avoiding a capital gains tax — a win-win situation.
The benefit of the deduction for full fair market value is available only if the donor has held the securities for at least a year, in other words, only if the unrealized gain would have been long term.
If the donor has some attachment to the particular investment, they might consider making a gift of the appreciated securities and repurchasing the same securities on the market with other funds. This will have the effect of resetting their cost basis, thereby minimizing taxable gain on a future disposition.
Appreciated securities are also an appropriate asset from which to fund a gift annuity (see below).
The income tax deduction for a contribution of long term “capital gain property” to a public charity is limited to 30 percent of the donor’s adjusted gross income in that year. Any excess is carried forward for up to five years, subject to the same percentage limitation.
If your donor is making multiple gifts in a single year, subject to different percentage limitations, they will want to seek advice from qualified tax professionals in order to maximize the tax benefit.
If the donor has held the securities for less than a year, in other words, if the unrealized gain would have been short term, their deduction is limited to cost basis.
A donor can designate an exempt organization as a beneficiary of a policy of insurance on their life. When the time comes, the nonprofit receives the proceeds.
This arrangement allows the donor to provide a large gift to benefit charity, often more than they would have been able to donate outright during life, without impairing their current cash flow.
The donor’s heirs and legatees benefit indirectly as well, because policy proceeds distributed to an exempt organization are deductible for estate and inheritance tax purposes, leaving more to be distributed to them from otherwise taxable assets.
Obviously the donor must be insurable.
It is also possible for a donor to transfer ownership of a policy to an exempt organization during life, and claim a deduction for the cash value of the policy. If the policy is not paid up, the donor may claim deductions for further contributions to fund ongoing premium payments.
In this scenario it is important, however, in order to avoid “private benefit” issues, that the policy be owned entirely by the exempt organization, and that the exempt organization be the only beneficiary of policy proceeds at the death of the insured.
As noted, there are potential issues with “private benefit” if a policy transferred during the life of the insured is owned by the exempt organization only in part, or if any portion of the proceeds would be payable to nonexempt individuals or entities. Since 1999, the tax Code has expressly forbidden so-called “charitable split dollar” arrangements.
If a donor has made a gift of a policy on which premiums remain to be paid, the exempt organization will have to monitor the situation to determine whether it still makes sense to keep the policy in force.
A donor can gift real estate to a nonprofit, removing a large taxable asset from their estate and receiving the benefit of an income tax deduction equal to the appraised fair market value of the property, with no capital gains tax due on the transfer. The nonprofit can then either sell the real estate or keep it for its own use.
The typical donor of real property might have accumulated multiple properties over a period of years, in which they have fairly low adjusted basis as compared to fair market value. Some have been through multiple like-kind exchanges, and are still carrying historically low basis in properties worth several times what they started with.
In some cases, the donor may want to give a fractional interest in the property in anticipation of a sale, offsetting some portion of their taxable gain with an income tax deduction.
1. If the donor has claimed depreciation deductions with respect to the property, some portion of the unrealized gain might be “recapture,” which would be taxed at ordinary rates. In that circumstance, the income tax deduction would be limited to the donor’s adjusted basis, rather than full fair market value.
2. If the property is encumbered by debt, the tax Code will treat the transfer as a “bargain sale” (see below), with the transferor realizing gain as though the recipient exempt organization had assumed the debt, even where there are express agreements to the contrary.
On the other hand, as the transferor continues to make payments on the principal amount of the debt, these are treated as additional, deductible contributions to the exempt organization.
3. If the recipient organization does not intend to use the property, they will want to be assured of a ready market in which to sell. But if there is already a “buyer in the wings” to whom the organization would undertake an existing obligation to sell, this would be treated as an “assignment of income,” and the donor would be taxed on the gain. It is important to complete the gift before the sale contract becomes enforceable.
4. In accepting a gift of real property, an organization will want to engage in some amount of due diligence to assure that the property does not carry environmental hazards, which the organization may become responsible to abate.
Here we are talking about gifts of items such as artwork, collectibles, books, equipment, or other items of tangible personal property. In many cases, the gift can yield the donor a charitable deduction for the items’ fair market value. Depending on the claimed value, it may be necessary to obtain a “qualified appraisal.”
Anyone who has tangible personal property they wish to dispose of might be a source of these contributions. If there is a pending sale, the donor may want to contribute a fractional interest in the property in order to deflect a portion of the taxable gain.
If the recipient organization will not be using the property in furtherance of its exempt purposes, but instead simply selling it, the deduction will be limited to the donor’s adjusted basis. In the case of a vehicle such as an automobile, boat, or airplane, the deduction will be limited to the gross proceeds of the sale.
The recipient organization is required to file an information return with IRS if it sells the property within three years.
A donor can name a nonprofit as the beneficiary of a portion or all of their IRA, 401(k), or other retirement Account. After the donor’s death, the amount designated passes to the nonprofit, and the donor’s heirs avoid income and estate tax on that amount.
Any donor who may want to leave a charitable legacy should consider funding that legacy from their retirement accounts, as these would otherwise be subject to income tax in the hands of their heirs. Other assets will have acquired a fresh tax basis at the donor’s death, so that taxable gain on disposition of those assets will be minimal.
An entity is not a “designated beneficiary” for purposes of the tax rules governing required minimum distributions. Thus, if the exempt organization is named as one of several beneficiaries of a retirement account, it may be necessary to distribute its share fairly quickly after the donor’s death in order to preserve any deferral in the distributions to other beneficiaries.
A donor may make an irrevocable gift of cash or securities to an exempt organization in exchange for an annuity contract, paying a fixed annuity for the donor’s life or for the life or lives of other annuitants. The donor claims an income tax deduction for the present value of the residuum to the issuing charity.
If the annuity contract is funded with appreciated property, the transfer is treated as a “bargain sale” (see below). If the donor is the annuitant, or one of the annuitants, gain is realized as part of the annuity payout, spread over the donor’s life expectancy, somewhat in the manner of an installment sale.
A typical donor might be holding highly appreciated property that is generating little or no income, but which they are reluctant to sell because of the tax on capital gains. The gift annuity can address both these problems simultaneously, deferring gain recognition while affording the donor a fixed annuity stream well in excess of the income the property had been yielding.
If the donor is not also the annuitant, gain on the transfer of appreciated property is recognized immediately.
If the transferred property is encumbered by debt, this also is treated as a “bargain sale,” but that portion of the gain is recognized immediately, even if the donor is the annuitant, rather than spread out over their life expectancy.
A donor’s gift is pooled with gifts from other donors who support the same nonprofit, and then invested to pay each donor ordinary income, usually on a quarterly basis, pro rated from their share of the fund.
As each participant dies, that portion of the fund passes to the sponsoring organization. As with the Gift Annuity, a donor can avoid capital gains tax by using appreciated assets to fund their gift.
Because the Pooled Income Fund distributed only current income, or in some cases realized short term gains, the payout is not fixed, as with the Gift Annuity, and it is often rather low. The typical donor will have a greater tolerance for fluctuating, modest payouts.
Because payouts from pooled income funds tend to be relatively low, the tax benefit will often lie primarily in the deduction for the contribution to the fund. Some fund sponsors have begun offering funds which include realized short term gains in “income,” and some have redefined “income” with reference to “total return.”
The favorable tax treatment of these funds requires that there be an actual “pooling” of investments by multiple contributors. While some sponsors have begun offering funds with minimal pooling among related parties, these have not secured formal approval by IRS.
The donor contributes cash or, more typically, appreciated property to fund the trust, which then pays a fixed annuity, either to the donor or to another individual, or both, for a term of years or for life. Gain on the sale of contributed property is not taxed immediately, but is spread out over some number of years through the annuity payout. At the end of the trust term, the remainder is distributed to one or more charities selected by the donor.
The amount of the annuity must be at least five percent of the value of the contributed property, but no more than fifty percent, and the present value of the remainder to charity at the outset must be at least ten percent. If the trust is for a term of years rather than for one or more lives, the term can be no longer than twenty years.
In general, charitable remainder trusts are a vehicle for selling appreciated property within an exempt entity (the trust) and deferring recognition until later distribution of the annuity or unitrust amounts.
The annuity trust in particular may be attractive to a donor who wants the assurance of a fixed payout. The tradeoff is that a fixed annuity may deplete the fund over time.
1. IRS has taken the position that if there is a more than five percent probability at the outset that the annuitant will outlive the term over which the annuity would exhaust the trust, using current assumptions as to market returns, the trust will not qualify. This can be a particular problem when prevailing interest rates are low.
In 2016, however, IRS issued guidance saying that if the trust instrument includes a mechanism that would accelerate the remainder to charity if the next annuity payment would otherwise exhaust the trust, the “probability of exhaustion” rule will not apply.
2. Because the settlor has retained an “income” interest in the trust, the value of the remaining trust corpus will be included in their taxable estate at their death. If there is no successor noncharitable beneficiary, the remainder to charity will offset that inclusion with a charitable deduction.
But if the trust is to continue for the benefit of a another individual after the death of the settlor, the remainder to charity will not fully offset the estate tax inclusion, and IRS has taken the position that the trust instrument must require the successor beneficiary to pay the incremental estate tax in order to receive the benefit of the trust payout. It is of course possible to make other arrangements for payment of the tax.
A Charitable Remainder Unitrust is a charitable trust that pays a percentage of its principal, revalued annually, to the donor and/or other income beneficiaries the donor names for life, for a term of up to 20 years, or for a combination of both. Because the unitrust payout is recalculated annually, payments may fluctuate from year to year.
The donor receives a charitable income tax deduction for the present value of the remainder to charity. As with the annuity trust (described above), gain on the sale of contributed property is not taxed immediately, but is spread out over some number of years through the unitrust payout. At the end of the trust term, the remainder is distributed to one or more charities selected by the donor.
The stated unitrust percentage amount must be at least five percent but no more than fifty percent, and the present value of the remainder to charity at the outset must be at least ten percent. If the trust is for a term of years rather than for one or more lives, the term can be no longer than twenty years.
As indicated above, charitable remainder trusts are a vehicle for selling appreciated property within an exempt entity (the trust) and deferring recognition until later distribution of the annuity or unitrust amounts.
Because the payout from a unitrust fluctuates from year to year, this form of the remainder trust will not be attractive to a donor who requires the assurance of a fixed payout. But the unitrust form is a great deal more flexible.
In particular, if the property with which the trust is to be funded may not be expected to sell immediately, the trust instrument might include a “net income limitation,” so that the trust distributes only net fiduciary accounting income in early years, and then makes up the shortfalls in later years after the property is sold.
There are multiple permutations of the “net income with makeup” arrangement just described, which are beyond the scope of this brief introduction.
As with the annuity trust described above, because the settlor has retained an “income” interest in the trust, the value of the remaining trust corpus will be included in their taxable estate at their death. If there is no successor noncharitable beneficiary, the remainder to charity will offset that inclusion with a charitable deduction.
The donor contributes cash or, more typically, appreciated property to fund the trust, which then pays a fixed annuity, either to the donor or to another individual, or both, for a term of years or for life. Gain on the sale of contributed property is not taxed immediately, but is spread out over some number of years through the annuity payout. At the end of the trust term, the remainder is distributed to one or more charities selected by the donor.
The amount of the annuity must be at least five percent of the value of the contributed property, but no more than fifty percent, and the present value of the remainder to charity at the outset must be at least ten percent. If the trust is for a term of years rather than for one or more lives, the term can be no longer than twenty years.
In general, charitable remainder trusts are a vehicle for selling appreciated property within an exempt entity (the trust) and deferring recognition until later distribution of the annuity or unitrust amounts.
The annuity trust in particular may be attractive to a donor who wants the assurance of a fixed payout. The tradeoff is that a fixed annuity may deplete the fund over time.
1. IRS has taken the position that if there is a more than five percent probability at the outset that the annuitant will outlive the term over which the annuity would exhaust the trust, using current assumptions as to market returns, the trust will not qualify. This can be a particular problem when prevailing interest rates are low.
In 2016, however, IRS issued guidance saying that if the trust instrument includes a mechanism that would accelerate the remainder to charity if the next annuity payment would otherwise exhaust the trust, the “probability of exhaustion” rule will not apply.
2. Because the settlor has retained an “income” interest in the trust, the value of the remaining trust corpus will be included in their taxable estate at their death. If there is no successor noncharitable beneficiary, the remainder to charity will offset that inclusion with a charitable deduction.
But if the trust is to continue for the benefit of a another individual after the death of the settlor, the remainder to charity will not fully offset the estate tax inclusion, and IRS has taken the position that the trust instrument must require the successor beneficiary to pay the incremental estate tax in order to receive the benefit of the trust payout. It is of course possible to make other arrangements for payment of the tax.
A charitable lead trust might be thought of as the “reverse” of a charitable remainder trust. The lead trust pays a fixed annuity or unitrust amount to the donor’s designated charity or charities for a term of years or for the lifetime of the donor or another individual, and after the expiration of the trust term, the remaining trust assets either revert to the donor or are distributed to designated remainder beneficiaries, typically children or grandchildren.
Unlike the remainder trust, there are no minimum or maximum percentage payouts, no minimum required value for the remainder to noncharitable beneficaries, and no maximum term of years.
The lead trust comes in two flavors, “grantor” and “nongrantor.”
In setting up a “grantor” lead trust, the donor claims an income tax deduction for the present value of the annuity or unitrust stream to charity, thereby accelerating several years’ worth of deductions into the current year. The tradeoff is that the settlor is taxed on “phantom” income in outlying years. Typically, a “grantor” trust runs for only a few years, and the remainder reverts to the trust settlor.
A “nongrantor” lead trust is more commonly used as an estate and gift tax planning tool. There is no income tax deduction at the front end. Instead, the trust itself claims income tax deductions for the amounts it is distributing to charity on a current basis. The remainder gift to children or grandchildren is discounted by the present value of the annuity or unitrust stream. Often the design is to bring the present value of the taxable remainder gift close to zero.
If the trust settlor dies during the term of a “grantor” lead trust, there is a “recapture” of the deduction claimed at the front end, offset by the amounts distributed to charity in the interim.
A donor transfers a residence, vacation home, or farm to a charity, but retains the right to use (including rent out) or live in the property for life or a term of years. In exchange, the donor receives an immediate income tax deduction based on the fair market value of the property minus the present value of the retained life estate.
The donor must continue to cover any expenses and maintenance costs associated with the property during their lifetime.
The retained life estate gift is especially common among donors who either have no children, or whose children have no interest in keeping the particular property in the family.
It is possible to combine the retained life estate with a gift annuity to produce a result somewhat analogous to a “reverse mortgage.”
If the property is encumbered by debt, the transfer will be treated in part as a “bargain sale.”
In a bargain sale, the donor sells property to a nonprofit at a discounted price and receives a charitable income tax deduction equal to the difference between the market value and the sale price.
If the property has appreciated in value, the donor’s basis will be allocated between the “gift” and “sale” components of the transfer, and the donor will recognize some gain even if the price is discounted to their adjusted basis.
Nonetheless, this can be more advantageous to the donor than selling the property, paying taxes, and then making an outright charitable gift from the after tax proceeds.
The charitable gift annuity funded with appreciated property is an instance of the bargain sale. If the transferor is also an annuitant, the taxable gain is spread out over their life expectancy as part of the annuity payout.
A bargain sale may also arise if a donor contributes property that is encumbered by debt. The tax Code treats this as though the charity had assumed the debt, even if there are agreements to the contrary. On the other hand, the donor may claim further charitable deductions as they continue to pay down the debt.
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