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Planned Giving is a highly beneficial fundraising option for nonprofits. However, it can also be challenging to understand, legally complex, and require consultation with several experts such as financial advisors, lawyers, and more.
However, turning away from giving for these reasons is a huge loss of opportunity for nonprofit organizations.
This article aims to simplify planned giving, explain commonly used terms, and explore how your nonprofit can begin a planned giving program.
What is planned giving?
It is the process of assigning donations in the present to be given at a future date. For a more precise definition, it is the process of donating a pre-planned gifts either during the donor’s lifetime at a later date or once the donor has passed.
Planned giving helps donors who want to manage their taxes, like estate tax leave behind a legacy, or contribute a major gift that they otherwise wouldn’t have been able to make.
To understand this in its entirety, it is essential to understand a few common associated terms. The table below explores these terms.
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Common terms in planned giving
Terms |
Definition |
| Beneficiary | An organization designated to accept funds from a will or a trust. |
| Bequest | A bequest is a gift from an estate. It could be property, cash, or other assets as stipulated in the will. A bequest specifies an amount to donate or allots a percentage of the sum from an estate, cash amount, or leftover funds after making other payments. |
| Blended gift | It is a combination of an outright cash or in-kind donation with a bequest. |
| Deferred | It is a gift to be given at a later date. It is used interchangeably with planned gifts. |
| Donor Advised Fund | It is a fund owned and operated by nonprofit organizations, also known as sponsoring organizations. Donors to this fund have a say in how these funds are utilized. |
| Endowment | Endowments are a unique form of planned gifts. A large amount (principal amount) is invested, generating a constant income source. $25,000 is usually the minimum amount invested. |
| Non-cash Assets | A non-cash asset can be any item with appreciating value. It could be real estate, an insurance policy, cryptocurrency, mutual funds, etc. |
| Real Property | Real estate donation is also known as real property donation. It is an immovable asset such as land or permanent property. |
| Trust | A trust is a legal agreement that allows a third party, such as a bank or financial advisor, to hold assets on behalf of the beneficiary. There are three types of trusts:
|
Now that you are familiar with the definition and other common terms associated with planned gifts, let’s look at different types of it.
Types of planned giving
There are three primary types of planned gifts:
- Outright planned gifts in cash or kind.
- Planned gifts that generate income or provide other financial benefits to the donor and their loved ones.
- Planned gifts that are transferred upon the donor’s death.
Various planned gift options fall into one or more of the above categories. They are:
1. Outright planned gifts for planned giving
Bequests
A bequest is an official statement in a will, trust, or estate plan that allot a specific planned gifts to a charity named in the statement.
Bequests are a popular form of this giving, and they alone have generated $46 billion for nonprofits between 2019 and 2021.
There are three ways in which a bequest can be carried out:
- A specific amount of money is assigned to the charity.
- A percentage amount is given to the charity. For example, a percentage of a property’s value at the time of giving.
- A remainder amount is the remaining funds after all other bequests are paid.
Appreciated Securities
Appreciated securities are common stock in companies or mutual fund investments. The idea is that these investments have ‘capital gains’; that is, they gain value over a period of time. The amount invested today will yield higher returns in the future.
While capital gains are usually taxed, donating them to charity leads to a tax deduction, making it a lucrative planned gifts option for donors. Donors who give appreciated securities can avoid paying capital gains tax on the increase in value, making it an even more tax-efficient way to contribute. By donating these securities directly, the donor can also potentially reduce the estate tax, further benefiting their financial planning.
Life Insurance
Donors can choose to assign a charity as the beneficiary designation of their life insurance policy.
Donors can also choose to have multiple beneficiaries for their life insurance-planned gifts. When the time comes, the amount will be split between them, benefiting both loved ones and a charity they select.
This is an excellent option if a donor wants to make a major gift without affecting their cash flow.
Real Estate
Real estate planned gifts include residential properties, farmland, underdeveloped plots, or commercial property.
A gift of real estate can secure a significant real estate tax deduction for the donor based on fair market value. They will also avoid any capital gains tax. Donating appreciated real estate eliminates capital gain tax that would apply if the property were sold, making it an appealing asset for charitable giving
Personal Property
Personal property could include artwork, collectibles, expensive machinery, and other personal, tangible property.
This planned gifts is an excellent way to contribute a significant item while avoiding any insurance or costs to maintain the object. Nonprofits can then display the item for a fee, donate it to someone in need, or sell it in a charity auction for a profit.
Retirement Account Plan
Individuals over 70.5 years of age can donate up to $100,000 from their IRA to a charity for a tax deduction as part of qualified charitable reminder trust distribution.
Apart from this, individuals can donate their IRA, 401(k), and other retirement assets to charity so their heirs can avoid paying any tax on that amount.
2. Income-generating planned gifts
Charitable Gift Annuity
A Charitable Gift Annuity (CGA) is a contract between a charity and a donor. The donor makes a sizeable contribution to the charitable gift annuity in return for a partial deduction to their tax. In addition, they also receive a steady income from the charity for the rest of their lives.
Pooled Income Fund
A pooled income fund is a planned giving option that allows donors to make a tax-deductible contribution to a nonprofit and provide steady income to one or more beneficiaries.
In a pooled income fund, donations from multiple donors are pooled together, and the interest earned is distributed amongst beneficiaries. When a beneficiary passes, their share of returns is transferred to the charity.
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Charitable Remainder Annuity Trust
A charitable remainder annuity trust (CRAT) also called as charitable remainder trust is a large cash donation or the donation of appreciated property to a charity. In return, the donor or another beneficiary of their choice receives a fixed annual income for a duration (maximum 20 years) or the remainder of their life.
The amount received from the sale of the appreciated assets is not taxed immediately. Instead, the payout is split into fixed annual payouts for the beneficiary. The value paid could vary from a minimum of 5% to a maximum of 50% of the total value of the appreciated asset.
Remainder Unitrust
A remainder unitrust, like CRATS mentioned above, is a corpus of funds or assets donated to a charity. However, unlike charitable remainder trusts, unitrust payout returns are revalued annually; therefore, the payment differs yearly.
3. Planned gifts that protect assets
Lead Trust
A lead trust provides an annual fixed payment to a selected charity or charities of the donor’s preference for a duration of time. Once the trust term ends, the corpus amount returns to the donor or other beneficiaries.
It operates in the exact opposite manner of a charitable remainder trust.
Retained Life Estate
Retained life estate planned giving is when a donor donates their property to a charity but retains the right to live in it, rent it out, and use it at will for a fixed number of years or the donor’s lifetime.
In exchange, the donor receives an immediate tax deduction on the property’s fair market value minus its present value.
Bargain Sale
A bargain sale happens when a donor decides to sell goods or services to a charitable organization for less than the fair market value of the goods and services.
The difference between the sale price and the item’s fair market value is considered the planned gifts.
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Legacy vs. planned giving
Planned giving and legacy giving are used interchangeably. But are they the same?
Here’s what each term actually means:
- Planned giving: When a donation is planned in the present to be made later.
- Legacy giving: Charitable giving made after the donor has passed away.
Legacy planned gifts are often included in a giving program to ensure the charitable donation is passed on without any delay or cost of the probate process.
Many nonprofits, however, use the terms planned giving and legacy planned gifts interchangeably. This practice is popular because the idea of leaving behind a legacy is more appealing to donors and encourages giving.
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Planned Giving assets
The assets are cash funds or other valuable items you can consider gifting to a charitable organization.
Here are different assets donors can consider:
- Non-probate transfer vehicles
- Non-cash asset
- Real property
Non-probate transfer vehicles
Non-probate transfer vehicles are planned gifts that allow the transfer of the gift without needing a probate process. A probate process is a process of proving the will in court. Instead, these planned gifts are directly transferred to the nonprofit once the donor passes.
The deeds, transferred at the donor’s death, can include cash, real estate, savings accounts, and checking accounts.
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Non-cash asset
As the name suggests, non-cash assets include any planned gifts not in cash. These could include real estate, life insurance policies, and retirement accounts.
Real property
Real property can include any real estate, such as residential property, investment property, farmland, corporate buildings, etc.
Donors can donate this property in their giving, access rights, or ownership.
Are there tax benefits to planned giving?
Planned giving comes with its share of tax benefits. They include:
- Donation of appreciated properties such as real estate or securities to receive a like real estate tax deduction on the full market value of the asset and pay no capital gains tax.
- Donors who opt for a life-income gift receive a tax deduction on the asset’s full market value minus the present value of the income retained. If they fund their planned gifts with an appreciating asset, they do not have to pay capital gains tax.
- Planned gifts that are transferred upon the donor’s death such as bequests or beneficiary designation in a life insurance policy or other assets, do not receive a lifetime income tax deduction for the donor. Instead, the donor is not levied estate tax.
Read also: The ABCs of Political Donations: Tax, Tracking, and Limits.
Now that you know the basics of this giving, let’s explore how to begin your program.
How to start a planned giving program
This program can be a complex legal process. However, when your nonprofit is at a stage where you can plan one, always remember that this is about helping donors leave behind a legacy, make a difference, and contribute significantly to a cause they believe in.
It is a long-term fundraising strategy that requires long-term engagement with donors.
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To begin a planned giving program, here are steps you can take:
- Get your board members “on board” and ideate your strategy. Understand their point of view to understand the objectives of your program best.
- Form a committee of experts. Since it is a legal and financial process, you will need lawyers, financial advisors, a board member with your best interests at heart, a business owner who understands tax breaks and estate planning, and other such individuals to guide you.
- Establish a legacy society. People quickly associate with a brand and its meaning. Establishing a society under which you operate your planned giving program will create great brand recall. You can put together a good logo, brochures, and more.
- Establish policies for planned giving. Every nonprofit may or may not accept all forms of planned gifts. Their terms and conditions for acceptance also vary. Determine policies along with your committee members.
- Market your planned giving program: Get the word out there for donors to know you accept this giving. Add it to your website, announce it on social media, share brochures or let everyone know at events you organize.
- Develop a prospect research strategy. Understand the donors that are more likely to donate to a planned giving program and plan your outreach to them. Research donor prospects and use donor prospect research tools to reach them. You can also have internal metrics like donor recognition levels to identify prospective donors.
- Develop a consistent engagement strategy. Contact donors via phone calls, text messages, direct mail, and more to keep them engaged. Planned giving is about long-term engagement with donors. Never forget to plan a way to thank donors who intend to give a gift to your organization.
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Why Planned Gifts Matter
Significant Contributions: Planned gifts, alongside major gifts, are among the largest donations nonprofits receive, offering substantial long-term impact.
Legacy Preservation: These gifts help continue a loyal donor’s legacy, ensuring the organization’s mission thrives for years to come.
Long-Term Benefit: While they don’t offer immediate funding, planned gifts can significantly aid your nonprofit’s future operations and sustainability.
Often Overlooked: Many nonprofits fail to actively seek planned gifts, assuming they are difficult to predict since donors don’t always reveal their intentions in advance.
Identifying Potential Donors: By recognizing key traits such as donor loyalty and promoting planned giving, organizations can tap into this valuable, yet often untapped, source of funding.
Get started with your planned giving program
Planned giving is a large undertaking for a nonprofit organization, but its benefits, too, are huge. While major planned gifts fundraising is a quicker way to generate large income, planned giving encourages donors who would not otherwise be able to contribute significantly to your charity.
Begin the process of legacy giving today. If you need help planning your strategy, use our nonprofit fundraising template as a step-by-step guide and checklist.
