“We’ve talked about starting a planned giving program, but our staff lacks the expertise and time.”
“I’m under pressure to raise funds for this year’s budget. How can I invest in a program that won’t pay off for at least a few years?”
“I know that big hospitals and universities encourage planned gifts, but our group is too small.”
Sound familiar? We often hear this from nonprofits…. many of whom then watch their loyal older donors pass away and leave substantial bequests to other organizations that asked for their planned gifts. So how can your organization get its share of these funds from your current friends? We recommend that small schools, social service or cultural organization with established fundraising programs invest a minimum of 10% of their annual fundraising budget to planned giving.
What Do You Need in Order to Implement a Planned Giving Program?
- A Compelling Case for Support. Many nonprofits use planned gifts to build their endowment to ensure a permanent source of support for their mission. Others seek planned gifts for specific current programs, for capital needs or as a “rainy day fund”. Decide how planned gifts will be needed for your group. Focus your appeal on the people you will be able to better serve through planned gifts, rather than on your group’s needs.
- Sources of Support. Successful planned giving programs are built around longstanding friends of the group, aged 55+, who have the capacity to make planned gifts.
- Institutional Leadership and Commitment. Key volunteers have to accept responsibility for planning and implementing the planned giving program. Some volunteers can be recruited for their technical expertise. Others should lead by example by making their own planned gift. The CEO and Board must be committed to the program. Make sure they understand that the expense is short term and the return, though significant, will be long term.
- Staff Support. If in-house development staff lacks expertise or time to support the effort, consultants can help plan and implement the program. Staff or outside counsel is essential to give strategic direction volunteers, and to help identify, cultivate and solicit prospects. They provide face-to-face help in solicitations, in designing customized financial instruments, in arranging literature to support the effort, and in monitoring activities and results.
- A Recognition Program. Groups often recognize planned giving donors through membership in a Legacy Society. Members may be given recognition in the annual report and invited to a special annual reception.
- Gift Policies. Groups should determine what gifts they will accept, what gifts they will not accept (such as non-marketable real estate), and other policies related to receiving, valuing and using gifts.
- Investment Management/Advice/Administration: Banks, brokerage firms, and community foundations can be secured to invest and manage assets, provide tax reporting and handle other “back room” services.
Frequently the largest gift people make to an organization is a planned gift. Just as individuals put aside current dollars for their retirement, farsighted organizations invest some of their current development resources to secure assets for future needs.
Planned Giving Basics
- Planned gifts require philanthropic intent and confidence in the organization. Before considering a planned gift, the donor must want to support your mission in the future, and be confident that your group will be effectively doing so in the years to come.
- Planned gifts have at least as much to do with the donor’s financial needs as with the nonprofit’s financial needs. Donors want to do well along with doing good.
- The purpose for which a planned gift is used and when it is used may well be controlled by the donor through the placement of restrictions on the gift.
- A planned gift donated to a charitable organization can benefit the donor in the following ways:
- Allow a donor a charitable income tax deduction.
- Minimize capital gains.
- Reduce estate taxes, or provide the donor, donors or other recipients with an annual income for life.
- The donor participates in a thorough financial and estate planning process before committing to a planned gift.
- Planned gifts often are:
- Used in the future even though the recipient nonprofit has received current commitments.
- In some form other than cash.
GUIDE TO COMMONLY USED PLANNED GIFTS
Type of Gift: Outright Gifts of Cash
Example: Donor writes $100,000 check to nonprofit.
- Ease of making gift.
- Income tax deduction for full amount of gift.
Donor Profile: Wealthy person with spare funds.
Type of Gift: Outright Gift of Appreciated Property
Example: Donor transfers to nonprofit stock valued at $100,000 that donor purchased for $20,000.
- Income tax deduction for full value of stock.
- Avoidance of tax on potential capital gain of $80,000.
Donor Profile: Wealthy person with highly appreciated property who is concerned about capital gains tax exposure.
Type of Gift: Outright Bequest (By Will)
Other related options include specific bequest, residuary bequest and contingency bequest.
Example: Donor includes outright bequest of $100,000 to nonprofit in will or bequest of a percentage of the estate.
- Estate tax deduction for full amount of bequest.
Donor Profile: Person who is reluctant to part with assets prior to death and who has plenty of assets for family or does not have close family.
Type of Gift: Charitable Remainder Trust
A “life income gift” (during lifetime). Other related options include charitable remainder trust by will; used by donor especially to provide income stream for spouse.
Example: Donor creates trust and transfers stock worth $100,000 to it, retaining 5% annual income stream for life of donor (and/or another beneficiary).
Example: Upon death of donor (and/or other beneficiary), trust assets pass to nonprofit. With certain kinds of trusts (unitrusts) donor may make additional contributions to the trust.
- Donor receives income stream, which may exceed previous low yield.
- Avoidance of tax on potential capital gains.
- Donor can retain control over trust investments.
- Income tax deduction based on actuarial calculation.
- Donor can benefit others as well as nonprofit.
- Person holding low yielding and/or highly appreciated property who wants income for life or supplemental retirement income.
- Person who wishes to provide income to other persons before making gift to nonprofit
Type of Gift: Gift Annuity
(immediate) A “life income” gift. Other related options include gift annuity (deferred) and payments to donor start in the future.
Example: Donor transfers appreciated stock to nonprofit or its designee in exchange for its agreement to pay a specified fixed stream of income (annuity) to the donor (and/or another beneficiary).
- Donor and/or other beneficiary receives income stream a portion of which is income tax free.
- Capital gains tax reduced and spread out.
- Income tax deduction calculated on an actuarial basis
Donor Profile: Person holding low yielding and/or highly appreciated property who wants income for life or supplemental retirement income.
Type of Gift: Remainder Interest in Residence or Farm
Example: Donor transfers residence to nonprofit, but retains the right to live in home for life.
- Income tax deduction equal to the value of the nonprofit’s remainder interest calculated on an actuarial basis.
- Right to live in the residence
Donor Profile: Person whose residence is main asset and who wants to continue to live in the home, but is not concerned about preserving it for family after death.
Type of Gift: Life Insurance – Nonprofit as beneficiary, donor as owner of policy.
Example: Donor names nonprofit as beneficiary of life insurance policy.
- Retains ownership of policy and has access to cash value.
- No federal estate tax on life insurance proceeds due upon donor’s death.
Donor Profile: Person who wishes to retain control, who wants to make contributions in manageable amounts over time, and for whom the income tax deduction is not critical.
Type of Gift: Life Insurance – Nonprofit as owner of policy.
Example: Donor irrevocably assigns policy to nonprofit. Each year donor contributes annual premium amount to organization to allow it to pay subsequent premiums.
- Income tax deduction for lesser of policy’s value or net premiums paid.
- Income tax deduction for subsequent contributions
Donor Profile: Person who wants to make contributions in manageable amounts over time and for whom the income tax deduction is important.
Type of Gift: Life Insurance – Wealth replacement.
Example: Donor has transferred gifted property to nonprofit. Uses tax savings produced by income tax deduction to pay premiums on life insurance policy, the proceeds of which will be about equal to the value of the gifted property.
- Funds from life insurance policy go to family in compensation for the property contributed to the nonprofit.
Donor Profile: Person is making a planned gift (e.g., charitable remainder trust and at the same time wants to preserve estate for the family).
Type of Gift: Pooled Income Fund
Example: Donor makes contribution of $5,000 to nonprofit’s pooled income fund and makes additional payments as he/she desires.
- Simplicity of creation.
- Income tax deduction every year calculated on an actuarial basis.
- Provides income stream for life to donor and/or other beneficiary.
Donor Profile: Person of any age and any level of wealth who wants to make gifts in manageable amounts over time.
Type of Gift: Charitable Lead Trusts
Another related option is charitable lead trust (by will).
Example: Donor creates trust, transfers stock worth $100,000 to trust, and directs that trust is to pay nonprofit $8,000 annually for 15 years; at termination of trust, assets to be distributed to donor’s children.
- Allows property to be transferred eventually to family beneficiaries at a low transfer tax cost.
Donor Profile: Person who has assets with high appreciation potential and whose family can forgo the income from the assets for a period of time.
JWA Consulting helps small and medium sized non-profits develop more resources to strengthen their services. For more than twenty-five years, we have helped groups develop effective, ethical fundraising programs that get results.