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Practical advice for planned giving to nonprofit organizations

published in Oklahoma Bar Journal - Volume 83, No.14 | May 19, 2012

By Susan Shields and Stephanie Chapman

Charitable planned giving, during lifetime or at death, can take many forms. Charitable organizations usually cannot plan for either the amount of charitable contributions that they are likely to receive or the timing of that receipt. Instead, the “planning” involved in “planned giving” typically involves assisting a donor (the giver) with making a charitable gift that is in keeping with the donor’s personal goals and the donor’s financial and estate planning. Planned giving helps the donor achieve the donor’s objectives and desires to support a charitable activity or a charitable cause that they have already accepted.

A planned gift is a gift that is legally provided for during the donor’s lifetime and generally regarded as having been made at a particular date, although the principal economic benefits are not received by the charity until a later date. Death is the usual common denominator of deferred gifts. Although the donor plans the gift now and may even make a charitable contribution right away, its use by the charity is postponed until someone (often the donor) dies. The following is a brief discussion of some common types of planned charitable gifts.

Bequests

A simple form of planned charitable gift is a gift to charity in a will or trust that takes effect at the death of the donor. For example, a person may provide for the following type of specific bequest in his or her will:

“Upon my death, I leave the sum of $50,000 (or 5 percent of my estate) to the Oklahoma Bar Foundation.”

If a donor leaves the residue or remainder of his or her estate (what is left over after specific bequests are made) to charity, or a portion of the residue to charity, the donor makes a “residuary bequest.” A gift becomes a “contingent bequest” if the donor makes the gift dependent upon the occurrence or nonoccurrence of a specific event. For example, a contingent bequest may be used by a young donor who leaves all of his or her estate to his or her family, with a contingent beneficiary designation that provides that if all of the donor’s family dies before the donor, then the remainder of the estate goes to a charity.

In general, so long as a donor is competent, his or her estate planning documents may be amended prior to death. Thus, no charitable bequest in a will or revocable trust should be treated by the charity as a total certainty. It is advisable for a donor who wishes to make a charitable bequest for a specific purpose to contact the charity before drafting his or her will or trust. This will more likely assure that the gift is drafted in such a way as to be acceptable to the charity and in a manner that will accomplish the donor’s charitable purposes.

Outright planned gifts

While most planned gifts are also deferred gifts, this is not always the case. In many circumstances the donor achieves greater income tax benefits [1] by making a charitable gift today rather than including such a gift in his or her estate plan. Outright gifts can consist of any property that is transferred directly from a donor to a qualified charity, including cash, securities, real estate and personal property.

Cash gifts are the simplest form of charitable gift for both the donor and the charity. In the case of cash gifts, the total amount can be deducted from the donor’s annual income up to a limit of 50 percent (30 percent in certain circumstances) of the adjusted gross income of the donor. If the gift exceeds 50 percent of adjusted gross income, the deduction may be carried over up to five years or until the deduction is completely exhausted.

Gifts of appreciated securities to a public charity can result in additional tax savings to the donor. First, the fair market value of the securities at the time the gift is made may be taken as an income tax charitable deduction. The deduction limit for securities is 30 percent of adjusted gross income; however, again, the excess deduction can be carried over by the donor for the next five tax years. Further, in most cases, no capital gains tax is paid on the built-in appreciation of securities given to a qualified charity, so long as the securities are long-term capital gain property.

Outright gifts can also be made of tangible personal property, including art, jewelry, antiques, automobiles and other items. If the object donated is related to the work and purposes of the charity (such as a gift of a painting to an art museum), the donor may deduct the current appraised value of the gift from income taxes. As with securities, the deduction cannot exceed 30 percent of adjusted gross income but excess deductions may be carried over. If the tangible property given is not related to the recipient’s charitable purposes, then it is deductible only to the extent of its cost basis to the donor. Gifts of automobiles valued at over $500 to a charity are subject to special rules under the American Jobs Creation Act of 2004.

Real estate may also be given away as a charitable gift. The tax treatment for gifts of land, farms, homes and other real property is the same as the treatment of appreciated securities. Real estate can also be given in the form of a bargain sale. A bargain sale involves a donor who transfers appreciated property, such as real estate, to a charity in return for a price that is less than the actual fair market value of the property. The excess of the fair market value of the property over the sales price becomes a charitable contribution to the organization. The charitable contribution limit for bargain sales is 30 percent of adjusted gross income.

Under the strategy of making a gift with a retained life estate, donors may gift their personal residences or farms to a charity and continue to live there for the remainder of their lifetimes. The agreement can be made for one or two lives or for a term of years. The donor receives an immediate income tax deduction for the present value of the remainder interest going to the charity. The property gifted may be the donor’s principal residence or a second home, vacation home or even stock in a cooperative apartment used as a residence. A written agreement is necessary to establish who will be responsible for repairs, property taxes, casualty insurance and ongoing maintenance for the gifted property. For example, if the residence is rented out to others, the agreement should provide for management of the property and specify how rent will be divided. The agreement also should cover the disposition of the property in the event the donor chooses to move away.

The donor receives a benefit by making a gift with a retained life estate by removing a significant asset from probate and estate tax exposure. The donor also receives a current charitable deduction for income tax purposes, bypasses capital gains tax on the property and retains the right to live in the property for his or her lifetime.

Gifts in trust

A donor may wish to give assets to charity in a manner that will pay lifetime income to a donor or a designated beneficiary. Alternatively, a donor may wish to give an income stream to charity, retaining a reversionary interest in the gifted assets. However, a donor is only entitled to a charitable deduction for income, gift or estate tax purposes when he or she makes a contribution to a charitable organization by means of a trust if the gifts are made in a qualifying charitable lead trust, qualifying charitable remainder trust or a pooled income fund. A charitable lead trust provides income to a charity for a defined term with the trust remainder ultimately passing to noncharitable beneficiaries, such as the donor, or the donor’s family. A charitable remainder trust provides income to the donor or the donor’s family for a defined term with the remainder passing to charity.

Charitable lead trust and charitable remainder trust income payments may be made annually, or more frequently, and the payments may be fixed annuity payments or fluctuating unitrust (i.e. percentage of principal) payments. Both charitable lead trusts and charitable remainder trusts may be created either during a donor’s lifetime or at the donor’s death. The defined term of the trust may be for a term of years or measured by the lifetime of the donor or another person. The determination of whether to use a charitable lead trust or a charitable remainder trust, and the decisions on these variables, should be considered in light of each particular donor’s personal and tax planning objectives.

Charitable gift annuity

A charitable gift annuity is a contract between the donor and the charity. The donor makes a gift of cash or appreciated securities qualifying for long-term capital gain treatment to the charity in exchange for the obligation of the charity to make fixed income payments for one or two lifetimes. The rate of return is based on the age of the beneficiary or beneficiaries at the time of entering into the annuity agreement. The annuity contract is a general obligation of the charity, and is the only type of gift arrangement that requires the charity to back the obligation with assets of the organization.

In a charitable gift annuity, the value of the property transferred by the donor is greater than would be necessary to purchase a commercial annuity of the same amount. The difference is the gift portion of the annuity, and this factor provides the basis for a charitable income tax deduction. The value of the annuity must be less than 90 percent of the value of the gifted property to qualify as a charitable gift annuity.

Most charities who issue gift annuities subscribe to rates published periodically by the American Council on Gift Annuities. Doing so avoids the need of the charity to independently obtain actuarial tables.

Life insurance

Donors may also choose to designate a charity as the primary or contingent beneficiary of a life insurance policy. Estate tax benefits are generally realized by having these assets pass to charity. Donors who wish to name a charity as the beneficiary of their life insurance policy get leverage by making a charitable gift at a fraction of the face value of the policy.

Sometimes a donor has a life insurance policy which is no longer needed because the original reasons for its existence have been fulfilled. A donor may choose to use such a policy to complete a pledge for making a major charitable gift without having to expend additional dollars.

As with bequests, a donor can also name a charity as the contingent beneficiary of a life insurance policy. A donor can also assign dividends from a policy to a charity and receive income tax deductions as the charity receives the dividends.

Gifts of retirement plan assets

Donors may also designate a charity as a primary or secondary beneficiary of a qualified retirement account, such as an IRA or a 401(k) account. If the qualified plan assets pass to charity after the death of the account owner, an estate tax charitable deduction will be available and income tax liability will be avoided. Historically, however, lifetime charitable gifts funded with retirement plan assets have not been favorable from a tax standpoint. To make a lifetime gift, the donor must withdraw assets from a plan, report the withdrawal as taxable income, and then claim a charitable deduction for the gift, which deduction may not entirely offset the income tax liability.

The provision for tax-free distributions of up to $100,000 from IRAs for donors age 70 ½ and older to public charities expired at the end of 2011. This tax break may be reauthorized by Congress later in 2012.

Proposals related to planned giving

The past few years have been a tumultuous time, and the tax system has been the focus of numerous proposed and actual overhauls. The area of planned giving has not been spared. For the past three years, the president has proposed a 28 percent cap on itemized deductions, including charitable deductions, for individuals with annual incomes of $200,000 or more and for families earning $250,000 or more. While a number of people had, optimistically it turns out, predicted that the charitable deduction would be excluded from the proposed cap this year, the proposed budget does not include such an exclusion. [2] Interestingly, the cap is part of the “Buffett Rule,” a reference to billionaire Warren Buffett’s stated frustrations with the perceived inconsistency of the current tax code.

In addition to the cap, the current budget proposal would eliminate a charitable deduction for conservation easements on golf courses. The rationale given for this proposal is that conservation easements are often overvalued and more so in the context of golf courses because nearby property owners can benefit from overvaluation separate from the deduction. Finally, although the expired allowance for tax-free distributions from individual retirement plans for charitable purposes is often cited as a popular provision, the proposed budget did not include such a provision.

The budget is not the only proposal for tax reform. Numerous other proposals would convert the charitable deduction into a credit. Some even contemplate that the IRS could pay the credit to charities, as opposed to refunding it directly to the taxpayer. These seem unlikely to gain widespread support, but are being discussed in congressional testimony and other writings. Further, some have proposed limiting charitable contributions to allow a deduction only for contributions in excess of 2 percent of adjusted gross income.

Conclusion

“Planned giving” can be a misleading label. Numerous techniques currently exist to afford taxpayers tax deductions for charitable gifts even where the charity cannot be certain when or how much it will receive. However, at a time when charities are struggling to find new funding sources and maintain their existing relationships, beggars can’t always be choosers. And in a time when comprehensive tax reform seems more and more likely, all tax planning, including charitable planning, is a little more interesting.


  • This paper does not address the tax rules applicable to charitable planned giving in detail. However, reference may be made to Internal Revenue Code Sections 170 et seq. and IRS Publication 526, “Charitable Contributions.”
  • The budget proposals can be found in General Explanations of the Administration’s Fiscal Year 2013 Revenue Proposal (the Green Book) published by the Treasury Department.