Charitable Donations Through Planned Giving
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.
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:
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.
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.
One very common planned giving instrucment 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.
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:
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.
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.
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.
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.
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.
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