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Planned Giving

Mike Vinyon, JD, CTFA
Vice President, Wells Fargo Charitable Management Group

“Deferred” or “planned” gifts are becoming more and more popular. While many of us have made direct donations through cash, check, or appreciated stock, the concept of a “planned gift” might seem more daunting. A brief introduction, however, can remove the mystery that surrounds them.

What is a Planned Gift?

The main difference between a planned gift and a direct gift is that a planned gift will be completed at a date in the future. The donor retains some interest in the gift property until the planned completion of the gift. Planned gifts also often serve some purpose in addition to philanthropy.

The easiest planned gift to understand is a bequest. Through your will and estate plan, you direct that certain property will pass to a charity upon your death. Because you retain control over the property, you do not receive any economic benefit in the form of a charitable deduction during your lifetime. Your estate, however, will realize a charitable deduction for the value of the assets you have bequeathed to charity.

Not all planned gifts require the donor to wait for an economic benefit. Many planned gift arrangements provide for significant tax and other incentives both on the date of the gift and the period preceding the completion of the gift. While the IRS generally will not allow a deduction for contributions made to a charity if only a partial interest is transferred, certain gift arrangements sanctioned by the IRS generally allow the donor to retain interest either in the income from the asset or in the asset itself.

Retained Income Gifts

In many cases, donors may wish to make a gift to a charity, but are concerned that they may need the gift asset to support them at a later time. Such a donor may be well served by one of three retained income planned gift techniques, all of which provide an income stream to the donor (or others) while providing a charitable deduction on the date of the gift.

The very popular charitable gift annuity is perhaps the simplest of these arrangements. When you establish a gift annuity with a charitable organization, you are making a deal with them: “I, the donor, give cash, stock, or some other asset. You, the charity, will pay me (and another, if I so choose) $X for the rest of my life (and/or another’s life).” The amount of the income stream will be a percentage of the value of the gift, and is based on the age of the person(s) who will receive the income.

Donor advantages:

  • Immediate charitable deduction based on the future gift to the charity
  • Fixed income stream for life (part of which may be free of income tax)
  • Avoidance of immediate capital gains tax if appreciated assets are gifted

 A pooled income fund (PIF) is similar to a gift annuity in that you give assets to a charity in exchange for an income stream. When you donate to a PIF, your gift is commingled with the gifts of others. You have a share of the pool, so you receive a share of the income produced by the pool for your life. Think about a PIF as an income-bearing mutual fund administered by the charity.

Donor advantages:

  • Immediate charitable deduction based on the future gift to the charity
  • Variable income stream for life based on the income generated by the fund
  • Ability to avoid capital gains on donated appreciated assets

A charitable remainder trust (CRUT) also provides a stream of income to you or others. However, a trust (rather than the charity) holds the assets and distributes them to the named charity after the life of the person receiving the income (or after a certain number of years). A charitable trust provides planning flexibility. For example, whereas the income stream from a gift annuity or PIF is determined by your age and/or the value of your gift, the distribution from a charitable trust can be a percentage of the trust’s value, the actual income earned, or a combination of the two. A charitable trust may be a good choice if more complex assets, such as land or a closely-held business, are involved.

Donor advantages:

  • Immediate charitable deduction based on the future gift to the charity
  • Income stream based on a chosen percentage of the trust’s market value, the income generated, or possibly both
  • Ability to diversify holdings and increase income, while deferring and prorating capital gains taxes on gifted appreciated assets
  • Avoidance of estate taxes on gifted property

Retained Asset Gifts

When faced with a potentially significant estate tax liability, one estate planning goal is to pass on assets to your heirs at a reduced estate or gift tax cost. One tool that fulfills this goal is a charitable lead trust (CLAT). In operation, this works the opposite of a charitable remainder trust. You establish a trust that distributes an income stream to a charity during your lifetime or for a period of years. At the end of that period, the value of the assets passes to others, usually your heirs. You are able to reduce estate taxes and transfer assets at a “discounted” gift tax rate. Here’s how it works: When you establish a charitable lead trust, you receive a charitable gift tax deduction for the value of the income stream to charity. You pay gift tax on the value of the assets placed into the trust, less this charitable deduction. Therefore, if the value of the trust increases (or remains at its initial value during the term of the trust), you have effectively passed those assets on to your heirs and paid less gift tax than if the assets had passed through your estate, or if the gift been made outright.

Donor advantages:

  • Ability to reduce estate taxes and transfer assets at “discounted” gift tax rate
  • Ability to effectively use the Generation Skipping Tax Exemption
  • Ability to watch your donations at work during your lifetime

The proper use of a planned gift can fulfill not only philanthropic desires, but also a host of other needs. Many charities have planned giving specialists who help people discover the benefits of these and other gifts. Maybe it is time to take a closer look!

This article is for information and educational purposes only. You need to evaluate the merits and risks associated with relying on any information provided. Although this article may provide information relating to approaches to investing or types of securities and investments you might buy or sell, Wells Fargo and its affiliates are not providing investment recommendations, advice, or endorsements.

This article appeared in the Spring/Summer 2002 Giving Guide.