Planned Giving Legal Basics. December 14, 2017 Association of Corporate Counsel

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1 c Lakshmi Sarma Ramani December 14, 2017 Association of Corporate Counsel

2 What is planned giving? Planned Giving is an approach that donors take to give funds to charities through specific structures, outside of their discretionary income. A planned gift is a voluntary gift, often a major gift, that involves integrating personal, financial and estate planning concepts with a donor s plan for lifetime or testamentary giving. For the donor, a planned gift provides a way to give beyond the use of current assets, and it often provides significant estate tax benefits. (Source: Association of Fundraising Professionals). Planned Giving programs are beneficial to charities because of the potential for major gifts, but they can be complicated to administer and manage. 2

3 Examples of planned giving structures There are many types of planned giving structures, some of which are triggered by the death of the donor. These structures include: Bequests Donor Advised Funds Charitable Gift Annuities Retirement Plans/Life Insurance Charitable Trusts Endowments are often associated with planned giving approaches, but are often the result of a planned giving structure. 3

4 Why do charities/ donors engage in planned giving? Donors want to make a difference but can t do so with current cash on hand. Gifts made from a donor s estate could make a bigger impact for the donor and the charity. Future gifts can often be much larger than annual cash donations. Donors are not reaching into annual income, discretionary income, and can often make a larger gift through a planned giving vehicle. Donors can get tax benefits from some planned giving structures, like reducing their estate tax obligations. This could be impacted by the new tax bill being negotiated in Congress. Note: tax benefits to donors, could be changing depending on new federal tax bill. 4

5 Planned Giving Options: Bequests Donors give assets to charity through their Wills. BENEFITS: Very common form of planned giving. Donor makes a gift through his or her Will, could be through a trust or other embedded mechanicsm. Can be unrestricted, restricted, sometimes used to create endowments. DRAWBACKS: Subject to Will contests if not drafted clearly (name of charity incorrect) or beneficiaries believe does not reflect donor s intentions. Often require local counsel to defend charity against beneficiary claims. Be mindful of providing legal advice to potential donor. 5

6 Planned Giving Options: Retirement plans/life insurance Donors can make charities the beneficiaries of their retirement plans, life insurance policies, pensions or other similar structures outside of the scope of their Wills BENEFITS: Streamlined way to donate to charity outside of the scope of a Will DRAWBACKS: Donor intent is often more clear than with Wills Structure lends itself to an unrestricted gift, though that could be changed through language in a Will. Still, may be challenged by other beneficiaries Does not usually involve embedded structures. 6

7 Planned Giving Options: Charitable Gift Annuities Annuities set up by charities where donors make a gift to charity with a guaranteed income for a set period during their lifetime. BENEFITS: Usually large assets are exchanged by donor for the benefit of annual income, investing for the benefit of a charity. DRAWBACKS: Regulated by most state insurance departments or state securities departments as an annuity contract. Charity gets immediate benefit of the gift. Requires state filings and specific disclosures to donors. Charities must ensure that the same of a gift annuity complies with laws relating to sale of insurance. Donor gets immediate benefits of charitable tax deduction. 7

8 Planned Giving Options: Donor Advised Funds Donors put their assets in funds set up to benefit charities, which are then distributed at the donor s direction. BENEFITS: Simpler than setting up a private foundation. Immediate charitable deduction when transfer assets to the fund. Charity may not have a guaranteed distribution. Allow donors to grow initial cash or non-cash investment tax-free and control distributions over time. DRAWBACKS: Charity does not get value of entire gift at once, only upon distributions. Recent subject of IRS scrutiny with more stringent oversight. 8

9 Planned Giving Options: Charitable Trusts Donors put their assets in trust for the benefit of charitable purposes. Benefit to charity depends upon the structure of the trust. BENEFITS: Can receive fixed annuity or annual distribution from the trust charity is the trustee of charitable remainder trusts and assets transfer to charity after certain period. Donor can retain control charitable lead trust and transfer assets to a trust to benefit charitable purposes. Provides tax benefits to the donor, like no capital gains on sale of assets. Can receive charitable tax deduction upon asset transfer depending on structure. DRAWBACKS: Charity must understand how to meet the requirements of the trust. Charity must know how to account for transfers from trusts and manage trust assets (UPMIFA). Charitable remainder trusts require IRS approval and are treated as 501(c)(3) private foundations by the IRS. 9

10 A Note on Private Foundations Private Foundations are entities set up and funded by an individual or group of individuals (sometimes a family) solely to benefit charitable purposes. These entities are considered tax-exempt 501(c)(3) charities by the IRS, and are not public charities that receive their funding primarily from public sources. Private Foundations cannot be operated for the benefit of the individuals who fund or govern them. Individuals often set up private foundations as a form of estate planning, resulting in charitable giving in perpetuity, often on a much larger scale than other vehicles discussed above. Private Foundations are an alternative to a charitable trust, supporting organization and a donor advised fund. 10

11 Similarities/Differences Each of these planned giving vehicles has benefits and drawbacks, depending on the donor s situation and that of the charity. It is helpful to understand how the are similar, and how they differ, when developing, managing and supporting a gift planning program. 11

12 Source: 12

13 Source: Taproottheatre.org 13

14 Source: SEE Int l 14

15 Planned Giving Legal Thoughts Planned giving gives rise to a range of legal issues, and often is tied to a legal document signed by the donor (and sometimes also the charity): Litigation: when donors choose to make charities the beneficiaries of their estates, retirement plans or insurance plans, family members sometimes challenge the validity of a Will or intention of the donor Regulation: when charities sell charitable gift annuities, they are considered to be selling insurance, and are regulated by state insurance departments. There are also tax implications relating to donating and holding various types of planned giving vehicles. Maintenance: when a donor creates a planned giving vehicle, these structures require structures to ensure that the funds can be transferred to a charity and used consistently with the donor s wishes and the charity s needs. 15

16 Legal Thoughts Is the charity following all applicable laws relating to the type of planned giving vehicle involved (for example, registering with appropriate state agency to sell gift annuities)? Is the charity complying with UPMIFA (Uniform Prudent Management of Institutional Funds Act) and those variations per state. UPMIFA will come into play with managing investment assets on behalf of the charity, including endowments. Trustees Does the charity have clear policies and procedures to ensure that the board and relevant staff can manage gifts and investments from planned giving vehicles? Gift acceptance policy Stock gift policy Conflicts of Interest Endowments Is your charity prepared to defend itself against claims against the donation? 16

17 Resources Association of Fundraising Professionals National Association of Charitable Gift Planners American Council on Gift Annuities Council on Foundations American Bar Association Charitable Planning and Organizations Group committee.cfm?com=rp Planned Giving Design Center 17