Planned Giving Programs for Charities
GENERAL
Most successful charities are adept at fundraising through special events, ranging from car washes to the most elaborate social functions. These are excellent sources of income, as are grants and the increasing revenues from on-line donations. An additional, and essential, part of the long term financial health of any forward looking charity also includes a "deferred giving program," which is sometimes called a "planned giving program."
The reason it is called a "deferred" or "planned" giving program is because these are donations that have components which are deferred until sometime after the gift is first made. They are planned gifts in the sense that because of their complexity, they must be carefully planned, usually in concert with a donor's professional tax advisors.
Deferred gifts have many tax advantages that are attractive to high net worth donors, but there are also types of planned gifts that are just as attractive to other donors. Deferred donations can benefit not only a charity, but the donor's loved ones as well. Different types of planned gifts provide income streams to a charity, the donor or his family, while others guarantee a set monthly amount, or lump sum. The permutations are almost limitless.
All of these deferred gifts do have common elements. They all are pigeonholed by various sections of federal tax law, and each must strictly (well, almost always strictly) follow the tracks that the IRS has laid down that lead to successful implementation. All provide tax benefits of some sort, and all can cause problems for the donor and the charity if they are not technically correct. But, all in all, their advantages far outweigh any possible disadvantages.
There is a certain amount of groundwork that must be explored before determining if a robust deferred giving program is right for your institution.
DESCRIPTION OF DEFERRED DONATIONS
The concept of a deferred giving program is easier to grasp if you first realize that every donation has component parts, and that each of the component parts is established within a written agreement between the donor and the charity. For instance, let's presume a prospective donor (we'll call her "Jane") has $100,000 in a five year certificate of deposit ("CD") that pays 5% each year, and that Jane does not want to withdraw the CD before the five years is up. The CD is really is made up of two components--the right of Jane to receive $5,000 for each of the five years, and her right to receive the $100,000 back at the end of the five years. The IRS recognizes that a donation does have legally separate components, similar to the CD example, and that a donor can legitimately give a charity one of the components, and not all. Although the example does not fit within one of the IRS authorized pigeonholes, and thus does not generate a tax deduction for the donor, the concepts of the example can be applied to all deferred (planned) donations.
Trying to describe these gifts sometimes is difficult, but in the paragraphs that follow each is briefly laid out. If you want to learn more about each, simply click on the highlighted terms, and you'll navigate to a page that describes them in detail.
The Unitrust. One of the IRS qualified donations is called a living "unitrust". This involves the donor during his or her life transferring the title of assets to a trustee. The trustee manages the assets, and pays the donor from the trust each year an amount which is a specified percentage of the trust assets, such as 5%. If the trust was invested in stocks, for example, the value of the trust would fluctuate, and the donor would receive 5% of whatever the trust was valued on a particular date each year. If the value was up on that date, the 5% amount would go up for the ensuing year. If the value then went down on the next "value date," the 5% would be less the next year, and so on. The trust can last for the life of the donor, the life of the donor and then the life of other beneficiaries the donor chooses, or it can last just for the life of the other beneficiaries. When the trust is over, the charity gets whatever's left in the trust, which is called a "remainder". The donor could also provide that portions of the 5% go to him and other beneficiaries, splitting up the pie, so to speak. The combinations are almost limitless. More details . . .
The Annuity Trust. A variation of the trust is an "annuity trust." This is a trust where the 5% is determined on the day the trust is funded, and it never goes up or down, no matter how much the value of the trust fluctuates. The remaining features are basically the same as the unitrust. More details . . .
The Lead Trust . An "upside down" unitrust or annuity trust is called a "lead" trust. It can pay the 5% to the charity for the life of the donor, or for a set number of years. When this trust is over, the trust assets (the "remainder") then go to individuals selected by the donor. More details . . .
The Pooled Income Fund . There's also a type of deferred donation called a "pooled income fund." Think of it as sort of a mutual fund run by a charity. When the donor gives assets to the charity's pooled income fund, the donor receives a number of "units" based on the amount the donor contributed. Each unit is pooled with others, and the donor receives income from the pooled income fund based on the number of units owned, and on what the fund earned. Upon the donor's passing, the charity removes the units and cashes them out for itself. This type of donation also can pay income to individuals selected by the donor, similar to the unitrust. The biggest difference between the pooled income fund and the other trusts (unitrust, annuity trust and lead trust) is that there is a single trustee who invests all the donations to the pooled income fund from different donors--that's why it's a "pooled" donation. Also, a pooled income fund donation can be completed using fill-in-the-blanks preprinted forms. The other three trusts each require a separate trustee for each trust, and a separate trust document which is lengthy and is customized for the donor's needs. More details . . .
The Charitable Gift Annuity. This type of gift is not technically a deferred gift, but it is a part of many charities' overall planned giving programs. Pursuant to a one page agreement, the donor gives the charity a donation (preferably cash, but it can be certain types of other assets) and the charity gives the donor in return an annuity amount payable each year based on the donor's age and interest rates established by the American Council On Gift Annuities. Legally, the rates established by that Committee are not required to be used, but most charities do so. There is no trust or trustee involved; rather, the charity simply pays the annuity amount each year as an expense. In many states, including Florida, in order to offer this relatively simple type of donation, the charity must establish amount cash reserves to the satisfaction of the state insurance commissioner. This is one reason why it may be difficult for a new charity to offer this type of donation. More details . .
The Donor Advised Fund. A donor-advised fund is a charitable giving vehicle that offers immediate tax deductions to donors, yet allows several years for planning and potential account growth before any portion of the donation must be distributed to charities. Distributions from a donor-advised fund account are based on recommendations by the donors or other authorized parties. More details . . .
Attorney Jay Fleisher has extensive experience in all aspects of building a deferred giving program from the ground up. It includes preparing investment management and custodial agreements, obtaining IRS rulings approving the operative documents of pooled income funds to creating campaign ad copy for planned giving programs. Mr. Fleisher assists clients developing planned giving programs in West Palm Beach, Palm Beach County, throughout Florida and the nation.