Donors view planned giving as part of their philanthropic strategy. In general, their priority is to satisfy their charitable goals by supporting the nonprofit organization’s mission. In addition to fulfilling charitable intent, planned giving strategies also have significant benefits for the donor’s personal financial wealth.
It is crucial for planned giving officers to understand the personal financial benefits planned giving can provide to a donor in order to identify opportunities during exploratory conversations. Additionally, officers should be prepared to convey enough basic information about these benefits to further the conversation.
Before we summarize the benefits, it is important to understand the different types of planned giving strategies.
|Charitable Gift Annuity||A contract between the donor and the charitable organization in which the donor gifts to the charity cash or assets in exchange for a lifetime annuity. This gift could be eligible for an income tax deduction.|
|Charitable Remainder Trust||An irrevocable charitable trust that provides an income stream to the donor, spouse or family for a period of time. The trust remainder distributes to the charitable organization(s). Contributions to the trust could be eligible for an income tax deduction.|
|Donor Advised Fund||Donor creates an account with a sponsoring public charitable organization and makes irrevocable contributions of cash or other assets. Donors retain advisory rights on future grants. These contributions could be eligible for an income tax deduction.|
|Pooled Income Fund||A charitable trust managed by the charitable organization in which the donor contributes assets to a pooled fund. In return, the donor or designated beneficiaries will receive a proportionate share of the pooled fund’s income during their life. Donors could receive an immediate partial income tax deduction.|
Each planned giving strategy has its own unique list of benefits, as described below:
Charitable Income Tax Deduction: A planned gift to a qualified 501(c)3 organization may allow the donor to take a charitable income tax deduction, thus reducing their income taxes during the year of the gift. The amount or percentage of the deduction depends on various factors, such as the type of donated asset, the type of gift, the donor’s adjusted gross income and the asset’s cost basis (purchase price of the asset). The deduction equals the fair market value of the gifted asset on gift date minus the present value of the income expected (provided to the beneficiaries during their lifetimes based on actuarial calculations from an IRS provided mortality). Please refer to this link for more information.
Preferential Capital Gains Tax Treatment: The donor may receive better capital gains tax treatment on the appreciated asset that is gifted to a charitable organization than if the donor sold the asset outright. For example, if a donor were to buy shares of Amazon.com, Inc. when it first went public (May 15, 1997 at a price of $18 per share), today those shares would have appreciated significantly in value (as of May 31, 2021, Amazon closed at $3,223.07).1 If the donor sold those Amazon shares, they would have to pay a large capital gains tax; however, if those shares were gifted to a qualified charity or a charitable trust, the donor would not have to pay the capital gains tax. Instead, they could receive an income tax deduction. Please refer to this link for more information.
Reduction in Donor’s Taxable Estate for Estate Tax: Gifted assets reduce the donor’s taxable estate for estate tax purposes. This could be more appealing to those who have sizeable assets (roughly over $11 million for individuals and $23 million for couples). It might be worth engaging the potential donor on the question of their estate planning and how their charitable goals complement their estate plan. The federal estate exemption threshold for taxable estates is to revert back to $5-6 million in 2026; however, this may drop even lower due to the changing political landscape.
Diversification: Charitable gifts also provide the benefit of diversification of one’s investable assets. It could be viewed as an important example of risk management and mitigation. For example, by diversifying their stock portfolio, an investor could lower the reliance of their family’s financial situation on a particular asset, such as a single stock. Investing in assets (e.g., stocks) over the last decade has proven to be a wise investment; however, the 2008 Great Recession shows us that having concentration in a few stocks wreaked havoc on the portfolios of many individual investors. Therefore, diversification could be an effective tool to minimize this risk.
Family Financial Plan: Life income charitable gifts could be an important aspect of a family’s financial plan. These gifts could satisfy an income need for a donor or donor’s loved ones even after the donor passes away. The charitable gift of an asset that isn’t income-producing could enhance a donor’s standard of living. Essentially, certain types of charitable gifts unleash the financial benefits of owning assets by providing lifetime income payments to the donor’s life as well as to their beneficiaries.
An ancillary benefit for an organization is that a charitable gift can create a deeper connection between the organization and a donor’s beneficiaries, resulting in creating new donor prospects. This is especially true for donor advised funds, which could have an indefinite time horizon that could last for many generations. Thus, charitable gift conversations should be viewed not solely with the donor in mind but within the scope of a family centered multigenerational long-term mindset.
A charitable gift could provide greater peace of mind for a donor, not just for their charitable objectives, but also in addressing the financial objectives for them and future generations. The planned giving officer needs to be able to identify opportunities as well as understand the concepts of these personal financial benefits. As opportunities are identified and the conversations evolve with greater detail, it is recommended that the officer discusses the involvement of the donor’s financial advisor and/or accountant due to the potential impact on their personal financial situation.
In summary, charitable gifts have many tangible benefits, such as income tax savings, income needs, diversification and family financial planning. The details of these benefits are not necessarily needed in exploratory dialogues with donors, but it is important to understand the personal financial benefits and their basic concepts. This could make the catalyst for eventually securing life income gifts and deepening donor relationships.