Planned Gifts During Lifetime
Many charitable organizations today have planned giving offices as part of their fund-raising departments. They offer expertise on creative methods of giving that can be beneficial to you as well as to the charity.
What is “planned giving”?
Planned giving has been described as a way of giving that requires expert assistance. It is usually associated with bequests or with life income gifts, but it is much broader than that. It is a method, simply, of planning your gifts as part of your overall financial or estate planning.
A planned gift can be a single outright gift that fits your financial plans, a series of annual gifts you commit to, or some other giving plan. It is any thoughtful gift arrangement that involves planning ahead and not just writing a $25 check out of your checkbook.
Life Income Gifts
There are three main categories of life income gifts that usually come under the heading of planned giving. These options combine a gift to a qualified charity and lifetime income for you. If you wish, they can also provide income for another beneficiary such as a spouse, partner, child, or friend.
Charitable Gift Annuities
The charitable gift annuity (CGA) is the easiest and most popular life income gift. It is created as a contract between you and the charity you wish to support. For example, you make a gift of $10,000 (a frequent minimum gift annuity amount). In return for your gift, the institution promises to pay you a specified payout rate for your lifetime based on your age.
When you and the charity discuss setting up the annuity, you will decide the frequency of payments you will receive. The usual choice is quarterly, but monthly, semiannually, or annually also are options.
At your death, payments will start going to a second beneficiary if there was one (or, if the annuity is a joint contract with your spouse, will simply continue for the surviving spouse) until her death. When both beneficiaries are gone, the value remaining in the gift annuity will go to the charity for the purpose you indicated at the time you made the gift.
Taxation of Annuities
The taxation of annuity payments to you comprises three parts. The first piece is a tax-free portion that, like regular annuities, is considered a return of your own already-taxed funds. The second piece is capital gains tax if you used appreciated securities to fund the gift. The third piece is taxable as ordinary income in the year the payments are received. The charitable deduction for a life income gift is based on the age of the beneficiary, using the IRS life expectancy table, and the established payout rate for the gift.
Life income gifts may not be available from every charitable institution. Be sure that the organization you choose to support through a life income gift has a firm financial base. The contract with the institution requires it to make payments to you for your lifetime, and you want to be sure it's capable of making those payments for that length of time.
Although the income from a charitable annuity is less than a commercial annuity, the tax benefits make it a very popular way to make a gift and to retain lifetime income. The amount you used for the gift is no longer in your estate.
Deferred Charitable Gift Annuity
You may create a deferred gift annuity (DGA) when you don't need immediate income. You can indicate you wish to have payments start at a later date. For example, you tell the charity that you want the income to start when you reach age seventy or seventy-five, or whatever age you choose. That payment date will become part of your contract. By delaying payments for a year or more, your payout rate usually increases, as does your charitable deduction. The contract will include the exact payment you will receive when payments begin as well as the breakdown of the taxable portions.
Deferred gift annuities are considered an excellent retirement tool for several reasons. You remove funds from your estate, you are eligible for a charitable deduction in the year of the gift, and you will have guaranteed income starting at a date of your choosing.
You cannot add to annuities, but you can create as many new ones as you wish at the minimum gift amount. Some individuals create deferred charitable gift annuities in successive years, reducing their estate further, and building up the income that will begin sometime in the future.
For example, you can create a charitable gift annuity in 2010 for $10,000, with income to begin in 2020. In 2011, you create another annuity for $10,000 with income to begin in 2020. You can create annuities each year with the same start date for payments. By the time payments begin, you will have assured yourself of a nice, guaranteed income in addition to the annual gift to your favorite charity.
To avoid owing any estate tax, you and your spouse could set up separate individual annuities that end when each of you die. Because the annuity contract ends at death, it would no longer be part of either estate.
Pooled Income Funds
Another form of life income gift is a gift to a pooled income fund (PIF). A PIF is much like a mutual fund in that many donors make gifts to a single fund. Your gift is added to the fund and your share is prorated within the fund into units.
The minimum gift is often $10,000, but you should check with your charity to determine its requirements. You can usually make smaller additions to the fund later on, which will increase your prorated share of units.
Payments to you are determined by the actual earnings of the fund, the same as a mutual fund. There are management fees, which are deducted first. You will receive a pro rata share of those net earnings, usually quarterly. Payments can go up or down depending on the market, and payments are fully taxable as ordinary income.
Many charities have more than one PIF, each with different investment goals. You should check with your charitable organization to learn what the annual investment goal is as well as its historical performance before making a gift.
The value of a PIF rises and falls with the market, and there is no guaranteed return on your gift. At your death, your units are valued and removed from the fund. Those funds are then directed to the program of your choosing or for general operating funds of the charity.
Charitable Remainder Trusts
In prior chapters you read in detail about personal trusts. A charitable remainder trust (CRT) is similar in structure except that the trustee is frequently the charitable organization itself or a bank that oversees the charity's trusts. You make an irrevocable gift of your assets to the trustee when you establish a CRT. Like the charitable gift annuity and PIF, a CRT is a life income gift to a charitable organization with income to you.
Because trusts are more complex than cash gifts, annuities, or pooled income fund gifts, they require active management by a trustee. As a result, minimum gifts can be as much as $100,000 or higher. There is also an annual management fee involved with CRTs, just as with PIFs.
You may set up a trust for your life or for a term of years up to twenty years. The IRS requires at least a 5 percent annual payout based on either the value at the time of the gift or its value at a set time each year. You select which type of payout you prefer when you set up the gift. As with other life income gifts, the remainder in the trust at your death is directed to the program you specified when you signed the agreement.