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Understanding the ins and outs of the gift vehicles available to you and your donors is incredibly valuable to your work as a gift officer.
Why? Well, one big reason is taxes: A gift that's made by transferring an asset other than cash generally has a greater tax benefit for the donor.
But this isn't only about taxes. Annuities and trusts (together known as Life Income Arrangements), are tremendously flexible tools that can increase income in retirement, diversify assets, take care of heirs, and provide many other functions. We all know that none of these life income agreements are promoted as investment or financial planning tools--they are ways to help those donors who want to make a difference in ways that they have probably not considered very closely, and that may well allow them to make larger gifts than they ever thought possible.
This section is designed to help you assist your donors with:
- Current giving.
- Estate giving.
- Charitable life income arrangements. Specifically, in helping them examine arrangements that are a sort of combination of current and estate giving rolled into one.
By helping your donors unpack all the available giving options, you will help them maximize their gift to your organization, assure an income stream for beneficiaries, and enjoy considerable tax benefits.
Don't assume your donors understand how to maximize their gift by using assets other than cash to make their gift--nor that they know about the potential benefits of charitable Life Income Arrangements. Yes, it is simplest to make an outright gift from cash (as used here, "cash" includes payment by check, wire transfer, or credit card) but that may by neither the most income-efficient option nor the most tax-efficient option. Provided that your organization is set up to accept more complex gifts, you can assure your donors that you're prepared to make the giving process seamless.
As a gift officer, you can add value to your donor's philanthropic efforts by counseling them on the use of more complex assets and complex gift arrangements in their giving.
This section takes a closer look at the significant number of gift vehicles and how they can be successfully implemented during either life or through a well thought-out estate plan.
For example: A donor may choose to enter into a charitable gift agreement for themselves to make a gift and to receive current income, or they may establish a charitable gift annuity for a loved one in their estate plan. The spouse with the largest retirement fund may establish a charitable remainder trust that goes into action at their death for the benefit of their spouse--a very tax-attractive alternative.
It's important to note that Life Income Arrangements benefit from a current charitable tax deduction, and subsequently the asset is removed from the estate. If the gift happens via an estate plan, there's no current tax deduction to take, but the funding assets are likely removed from any estate tax.
Gifts That Take Place Upon Death
Most of the time a gift made via a donor's estate plan amounts to the largest gift they can make. But just as with giving during life, there is a range of things a donor can do via the estate plan in order to maximize the gift (and the tax savings).
A simple clause in a will or trust--as well as a simple beneficiary designation in a retirement fund--can ensure that your organization receives a major gift. But here are two more steps that you might recommend to your donor:
- Suggest that they consider what asset they want to go to your charity. Some assets are significantly more heavily taxed than others when they are withdrawn from the estate, so this is an important consideration regardless of whether the donor's estate reaches the size of eligibility for estate tax liability.
- Recommend that they specify how they want the gift to be used. Just as you require gift agreements for gifts during life, it will be of future benefit to your organization if the donor makes it clear, in writing, how they expect their estate gift to be used by your organization.
Charitable Life Income Arrangements (LIG)
A significant majority of LIG activity comes in the form of CGAs and Deferred Payment CGAs. There is a lesser but still meaningful amount of activity in Unitrusts (CRUTs) and very little activity in Annuity Trusts (CRATs).
Here are some other factors to keep in mind when helping a donor consider an LIG:
- A highly appreciated, low-yield asset is best for funding a LIG. (For this reason, mortgaged property seldom makes a good gift.)
- All LIGs are irrevocable: a charitable tax deduction is available for a portion of the value.
- The income may be: Fixed or variable depending on the life income gift vehicle chosen by the donor.
- The income may last for one or more lifetimes, a term of years or a combination of the two.
- LIGs are irrevocable once the contribution is made.
- LIGs are Subject to both Federal and State laws.
- Formulas, factors and other variables are specified by U.S. Treasury Regulations.
The two main factors to keep in mind when helping donors find the best LIG for them are age and number of beneficiaries. Expressed as equations, they look like this:
1) O + F + L = B
The Older the beneficiaries/annuitants, the Fewer beneficiaries or annuitants and the Lower the payout rate, the Bigger the tax benefits.
Benefactors over the age of 75 generally prefer charitable gift annuities. CGA payments range from approximately 4.5% to 9% (based on the age(s) of the annuitant(s)).
2) Y + M + H = S
The Younger the beneficiaries/annuitants, the More beneficiaries or annuitants and the Higher the payout rate the Smaller the tax benefits.
Benefactors under the age of 70 generally prefer charitable remainder trusts (CRTs), aka unitrusts and annuity trusts. The annual distribution from a CRT is generally in the 5% to 7% range (minimum required is 5%).
Benefactors in that sweet spot between the ages of 70 and 75 have more to think about when deciding between a CGA and a CRT. Depending on their objectives (largest charitable deduction possible vs. the greatest amount of income paid out) and their risk tolerance level, one of the charitable gift vehicles may be more attractive than the others.
Truly: this is where a great part of the fun of being a gift officer happens--assisting donors in making the decision that is best for their situation.
Each category in the Gift Vehicle section starts with an overview and includes individual pages about sub-types, how to value the asset, tax considerations, how to accept the gift, and more.
The individual gift vehicle pages digs into how they each work and how they can be successfully gifted. We've grouped them into 9 categories:
- Bargain Sale
- Charitable Gift Annuity (CGA)
- Charitable Remainder Trust (CRT)
- Pooled Income Fund (PIF)
- Retained Life Estate (RLE)
- Charitable Lead Trust (CLT)
- In Kind
Each gift vehicle section starts with an overview and includes individual pages about how it works, how to value the asset, attendant tax issues, how to accept it, and more.
All content provided by Philanthropy Works is provided in the spirit of education. It is not legal or tax advice. This material merely provides an overview of, and does not purport to describe completely, the requirements established by Internal Revenue Code, the Treasury Regulations and related IRS pronouncements. You and your prospective benefactors must consult an attorney for legal advice. You will note there are occasions in the material where PW contributors offer prejudices and opinions. Please accept them as such.