How To:
Planned giving is one of the most complex areas of nonprofit and tax-exempt
organization law. That it also typically deals with large sums of money makes it
mandatory that no responsible NPO would ever establish a planned giving program
or enter into any planned giving agreement without detailed advice from a lawyer
and/or accountant deeply familiar with these legal instruments. Accordingly,
this text will describe some of the more common planned giving mechanisms, but
will not provide enough detail for the reader to determine a complete course of
action for any particular case. It is critical that this text not be treated as
legal advice, and that a competent professional advisor must be consulted before
engaging in planned giving. The potential consequences of ignoring this
admonishment are dire.
This text provides only a very basic introduction to planned giving, and may
simplify (some would say oversimplify) many aspects of this complex topic.
Although many different planned giving mechanisms are described, the advantages
and disadvantages of each are not addressed here. The types of planned giving
instruments described here are not the only ones possible or even the only ones
used. Varients and new forms of such gift mechanisms are always being explored.
Some of the most common types of planned giving mechanisms are described here.
What is Planned Giving?
Planned giving, sometimes called deferred giving, is a method of making a
charitable contribution in which some or all components of the gift are only
distributed, or have their ownership finally resolved, after some event or some
period has passed. A wisely established planned giving mechanism can allow
charitable gifts to avoid estate taxes that may apply if the gift is instead
included in the donor's estate. Planning giving mechanisms can also provide
benefits for the donor during his or her lifetime, including tax deductions.
Planned giving takes one of two forms:
A legacy. This is a charitable gift provided for in a person's will (a bequest
or devise), which typically comes out of their estate.
A gift made during the donor's lifetime. This is a charitable gift in which the
donor recieves a tax benefit at the time of the gift, and usually also still
obtains some type of other benefit associated with the donated property. These
gifts are usually established with a contract that ends after a fixed period or
upon the death of the donor or some other person.
Legacies are treated much like ordinary charitable gifts. However, gifts made
during the donor's lifetime often take the form of trusts or other legal
arrangements that typically involve complicated contracts designed to fulfill
certain aspects of state and federal law to provide a tax benefit to the donor.
Trusts are the most common mechanism used to make charitable gifts that provides
tax benefits to the donor during her or his lifetime, while sometimes also
providing continuing income, use, or other benefit to the donor or to a person
or persons designated by the donor. For example, land trusts have historically
been used to donate land to a charity, such that the charity immediately obtains
ownership of the property, while providing that the donor is given use of the
land for his or her remaining lifetime.
Legal Regulation of Planned Giving
In order to obtain all the tax benefits specifically given to trusts, the
associated contract must be carefully written to fulfill the requirements of the
appropriate tax laws. The laws controlling planned gifts insure that a
charitable donation has truly occurred, and that the donor is therefore entitled
to the associated tax benefits. The laws further define what those tax benefits
may be, by (for instance) defining how to calcuate the donated amount and
establishing when it may be credited for a tax deduction.
There are both state and federal laws that address planned giving mechanisms.
Both must be considered and their requirements fulfilled when a planned giving
contract is devised, in order to obtain the maximum benefit for both the charity
and the donor. Several Model Acts have been developed and adopted by many states
to specify how charitable trusts and other planned giving mechanisms must be
structured in order for state tax benefits to accrue. Federal laws controlling
or affecting the tax benefits of planned giving mechanisms are scattered
throughout the Internal Revenue Code.
In part to insure that gifts are irrevocable, which is typically required under
law for a donor to obtain advance tax benefits, planned giving mechanisms often
use a "trust." A trust is a legal mechanism to establish the guardianship and
administrative responsibility for some property. This guardian or administrator,
called a trustee, is typically a third-party, and the role is often served by a
lawyer or bank. The laws regulating charitable trusts provide guidelines for the
duties and responsibilities of trustees.
Lawyers and accountants with detailed expertise in this field are not common and
vary tremendously in experience, so charities would be wise to insure that any
professional advisor retained for arranging a deferred gift or developing a
planned giving program is deeply familiar with the appropriate laws.
Split-Interest Trusts
One very common planned giving instruction is the "split-interest trust." The
key to understanding split-interest trusts is that they typically involve some
asset (the principal, principal capital, or property) that can generate income.
Two common examples are land that can generate rental income, and financial
investments that can generate interest income. Split-interest trusts are used to
give one party income during the period of the trust, while another party gets
full ownership of the income-generating property when the trust ends. The right
to the income generated by the property is called the "income interest"
("interest" is a partial legal ownership right), and the right to the property
itself is called the "remainder interest." The term remainder interest comes
from the fact that upon the trust's termination, full ownership and rights to
the remaining property (including the right to all future income it generates)
goes to the designated beneficiary, and the trust is ended. The term
"split-interest trust" indicates that the interests in the trust (i.e. different
parts of ownership) are divided between the charity, donor, and sometimes other
beneficiaries.
Charitable Remainder Trust
In a charitable remainder trust (CRT), a designated charity receives the
underlying property when the trust ends, while the donor or other beneficiaries
(at least one of which must not be a charity) receives income from the property
during the term of the trust. Charitable remainder trusts have one of two major
forms, each of which provides periodic payments during a specified term, but
which determine the payment amounts differently:
Charitable remainder annuity trust (CRAT)
The payments are in fixed amounts (i.e. an annuity).
Charitable remainder "UniTrust" (CRUT)
The payments are in amounts equal to a percentage of the underlying property's
net fair market value at the time of calculation. However, there are two varient
forms of CRUTs, called "income exception CRUTs." The IRS has issued regulations
allowing trustees of income exception CRUTS to convert ("flip") them into a
standard CRUT under certain circumstances (generating a "FLIP-CRUT" also called
a "FLIP unitrust").
Net income charitable remainder "UniTrust" (NICRUT)
A NICRUT pays only the net income earned by the trust each year, but not more
than a set percentage of the property's net fair market value.
Net income with make-up charitable remainder "UniTrust" (NIMCRUT)
A NIMCRUT (sometimes called a "spigot trust" or "type 3 CRUT") pays the net
income earned by the trust each year up to a fixed percentage of value, but
makes up any deficit below that percentage with surplus income in subsequent
years.
Pooled Income Fund
Pooled income funds are much like charitable remainder trusts, in that the donor
or other beneficiaries get income or other use of the donated property during
the lifetime of the trust, and the remainder interest goes to the designated
charity after some defined term or event. However, pooled income funds are
designed to allow many donors (typically an unlimited number), rather than just
one, to contribute to the trust, which also continues to exist past the end of
any individual donor's gift arrangements.
Charitable Lead Trust
A charitable lead trust (CLT) (sometimes called a "charitable lead annuity
trust") operates in a manner opposite to that of a charitable remainder trust.
In a charitable lead trust, a charity or charities receive income generated by
the property during the lifetime of the trust, and a designated noncharitable
beneficiary (sometimes the donor, but often an heir) receives full ownership of
the property at the trust's conclusion. This conclusion may correspond to the
lifetime of the donor or other individual, or after a shorter specified term.
Other Trusts and Deferred Giving Instruments
Charitable Gift Annuity
A charitable gift annuity is essentially composed of two transactions. The donor
makes a gift to the charity, and the charity in turn provides the donor with an
annuity (an obligation to pay a series of fixed amounts at specific intervals
over a defined term). The annuity is purchased by the charity for the donor,
usually using some or all of the donor's gift.
Conservation Property
There are special laws and tax benefits associated with gifts of real property
(land and associated buildings and other improvements), to a qualified
organization exclusively for conservation purposes.
Life Insurance and Other Deferred Gifts
Gifts of individual life insurance benefits are a relatively new planned giving
mechanism. The donor designates a charity as beneficiary for the policy, and can
receive tax benefits during his or her lifetime associated with past amount or
future amounts paid to purchase the policy. There are still some legal
uncertainties with regard to life insurance benefits as a mechanism for planned
giving. A similar type of deferred gift in which some advance tax benefit may
accrue to the donor is the contribution of retirement plan benefits.