Planning Articles and Links

Donors and Their Planned Gifts – Henry & Associates

Donors and Their Planned Gifts – Henry & Associates

Donor Motivations – Don’t Make Assumptions

What Motivates Donors?  
NCPG 2000 Survey of Donors


Charitable Bequest Donors vs. CRT Donors

Percent of donors citing “a desire to support the charity” as an important factor in their decision to make a gift97%91%
Percent of donors citing “the ultimate use of the gift by the charity” as an important factor in their decision to make a gift82%79%
Percent of donors citing “desire to reduce taxes (income or estate)” as an important factor in their decision to make a gift35%77%
Percent of donors citing “long-range estate and financial planning issues” as important factors in their decision to make a gift35%76%
Percent of gift donors who report no affiliation with the charity that will benefit from their planned gift.21%24%
Percent of gift donors who have not notified the charitable beneficiary of their gift.68%50%
Donors citing a financial or legal advisor as the first source of the idea for their gift28%68%
Donors citing a charity’s published material as the first source of the idea for their gift34%26%
Planned Giving in the United States 2000: A Survey of Donors (NCPG  

Planned giving is generally situational.  That is to say, the eventual gift to a charity may be a secondary consideration if it solves a current problem for the donor client.  As situations change, the opportunity to introduce a planned giving solution must adjust as well.  This is one reason that advisors need to promote and constantly reintroduce the use of planned gifts, since donor needs change.  What might not have been appropriate once may now be an ideal situation to make a gift.  Remember, planned gifts usually are made with assets, but annual gifts tend to come from income.  Planners need a different mindset to use both properly, as each type of asset triggers a different set of planning tools or concerns.  While donative intent is important, after all, it is a charitable planning tool; there may also be split-interest gifts generating legitimate donor benefits as well.

Gifts of Securities – these are excellent sources of charitable support.  Rather than sell $130 of stock and pay tax on the gain in order to make $100 gift, it’s much better to make the gift of appreciated stock directly to charity.  The nonprofit organization doesn’t pay tax on the paper profit and receives 100% of the fair market proceeds, while the donor gets a tax deduction for the entire value.  There are cautions about using stock as gifts, e.g., is the stock publicly traded or restricted in any way?  Rule 144 stock owned by insiders, or acquired with stock options, may create problems.  For mutual funds, the fair market value that fixes the gift for IRS tax deductions is the value at the close of trading, while individual stocks are valued as an average of the high and low for the day’s trading.  Closely-held stock in family businesses is more difficult to value and market when given to a nonprofit organization, and if the gift is intended for a private foundation, the deduction isn’t fair market value; instead, it’s the donor’s taxable basis.  S corporation stock must be carefully handled.  While recent changes in tax law allow its ownership by charitable organizations, the tax treatment often makes it an unattractive asset to receive by a tax-exempt entity.

Real Estate – great gifts, but there are more issues than with gifts of cash or stock.  Will there be environmental or legal restrictions on land use that affect its salability?  Was land held for development?  If so, it may be treated as an ordinary income asset or inventory, thus the deduction is limited to basis.  If it’s not inventory property, then is it mortgaged or encumbered?  Is it readily marketable?  If so, is there a buyer in the wings?  One of the problems with real estate contributions to a charitable trust is having the IRS label the sale as a step transaction, so any pre-arranged sales or disqualified persons acting as buyers may trigger future problems when a CRT is used, but the same concerns may not be a problem for a charitable gift annuity.

Life Income Plans – charitable gift annuities, charitable remainder trusts, pooled income funds and life estates all offer donors a chance to use an income tax deduction now for a gift that won’t pass to the charity until some time in the future.  Each type of tool provides the donor with varying degrees of control over the final disposition of the gift, the need for experienced private sector advisors and changing levels of income benefits.

Life Insurance, Retirement Accounts  & Savings Bonds – are terrific gifts, many times directed by beneficiary designation, and with savings bonds and retirement savings the donor avoids IRD treatment by passing 100% of the value directly to charity.

Don’t Make Assumptions

31% of all planned gift donors have never made even a cash contribution to the charity that benefits from their planned gift. Don’t make assumptions about your client/donor base.  While many donors are motivated by the most altruistic of intentions, there are other reasons for their charitable impulses (control, guilt, social interactions, religious, tax relief, community building, repayment, etc.) and commercial advisors may suggest a private foundation as a part of an estate plan.  Foundations have been used for years by the well to do.  Although with an increasing accumulation of wealth in the hands of the middle class, many of these families are now in the enviable position to create a family foundation as well.  From a “social capita” perspective, most people understand they have assets over which they will exert no control at death.  Therefore, they need to decide whether they want those dollars used to pay tax (an involuntary philanthropic payment to the IRS) or to self-directed charitable entities.

How best to regain control over those assets?  Consider using a private foundation for larger estates and a community foundation with a donor advised fund for smaller estates.  Where’s the break point?  Generally, $5 million or less going into a private foundation with family control is of marginal effectiveness from a management point of view.  The costs for creating the entity (either as a corporation or a trust), maintaining the records, filing the tax returns and paying the 2% excise tax that private foundations are required to submit are likely to erode the income and principal available to meet the required 5% payout for its charitable purpose.  An alternative tool is the increasingly popular “donor advised fund” in a community foundation.  The DAF provides the family with a voice in decisions to support charitable organizations of interest to them within the framework of a tax-exempt public charity.  Besides offering guidance, staffing and infrastructure, a community foundation provides a more attractive way to make use of the charitable income tax deduction for many assets like closely held stock and tangible property.  Additionally, using a community foundation avoids many of the tax traps associated with private foundations with regard to disqualified persons, prohibited transactions, self dealing and private inurement that gives the IRS ways to crack open a foundation and penalize its board for inadvertent mistakes or improper activities.  Properly done, this strategy offers advisors great opportunities to help their clients achieve a sense of fulfillment otherwise unavailable in traditional estate planning — offer it as an option and see where it takes the conversation.

PhilanthroCalc for the WebCONTACT US FOR A FREE PRELIMINARY CASE STUDY FOR YOUR OWN CRT SCENARIO or try your own at Donor Direct. Please note — there’s much more to estate and charitable planning than simply running software calculations, but it does give you a chance to see how the calculations affect some of the design considerations. This is not “do it yourself brain surgery”. When is a CRUT superior to a CRAT? Which type of CRT is best used with which assets? Although it may be counter-intuitive, sometimes a lower payout CRUT makes more sense and pays more total income to beneficiaries. Why? When to use a CLUT vs. CLAT and the traps in each lead trust. Which tools work best in which planning scenarios? Check with our office for solutions to this alphabet soup of planned giving tools.