Planned Giving 101 The Basics or So, this is how we ll build our endowment! A Presentation for 2014 Management Conference Magic and Mayhem by James E. Gillespie, President & CEO of P.O. Box 50332 Indianapolis, IN 46250-0332 Phone: 317-826-3300 Cell: 317-445-8870 Fax: 501-644-9297
Your presenter James E. Gillespie, CFRE President & CEO of Consultants in Philanthropy since 1995 Was a development officer for previous 25 years For Junior Achievement For Indianapolis Symphony Orchestra For Riley Children s Foundation (a client relationship) Books and articles published by Jossey-Bass Indiana University Press Lead Faculty for The Fund Raising School A unit of IU s Lilly Family School of Philanthropy
Here s what we ll cover today Our purpose is to help as we Anticipate Potential Big Dollars that come via Planned Gifts Gain an Overview of Planned Gift Vehicles and How they Work Learn how Planned Gifts can Stimulate and Build Current Giving
Sometimes we have additional concerns and we ll think this: I think Planned Giving will steal from my Annual Fund I don t have the time to do both Further, I don t know how to integrate them I don t have the prospects for Planned Giving I ll be long gone before they mature
Our job (we re all development officers) The role of a development officer is to create and facilitate authentic charitable motivation. If an organization takes money from people who would rather not give, then it may be engaged in a form of extortion. If people give on the basis of representation that is not correct, the organization is engaged in a form of fraud. If people give for purposes they really do not understand, the organization is doing a form of con. If they give in exchange for benefits they expect to receive, the organization is in the investment business. Nonprofits do their job best when they create, develop, and facilitate authentic charitable motivation. Harvey DeVries (my mentor)
Let s go back to one of our concerns I think Planned Giving will steal from my Annual Fund
The Case for Planned Giving For the individual: Planned gifts are the ultimate gift provisions that allow the individual to perpetuate his/her own values, interest, and influence into the future. For your organization: Endowment is the permanent capital of your organization, which provides funding to fulfill your mission for current and future participants.
The Case for Planned Giving Continued Planned Giving relates most compellingly to endowment development which undergirds the future and provides long-term financial stability. It is not a trade-off for present funding efforts. It is a qualitative addition.
2012 Contributions: $316.23 billion by source of contributions (in billions of [rounded] dollars) Giving USA Foundation TM /GIVING USA 2013
Bequests = $23,410,000 (billion) How much of this are we leaving on the table?
Social Capital The part of our wealth we cannot keep First, there is a person s personal financial capital. This is the wealth he/she spends, gives to his/her heirs wealth that is kept, invested, or spent. What is left? The second part wealth that cannot be kept, spent, or given to heirs. It is called social capital as it is legally destined to go to social issues beyond the individual and his/her family to education, social services and many other common needs.
Social Capital How donors can consider controlling all their wealth Typically social capital is given up in the form of taxes and people let it go at that. But when that happens they also give up control of that wealth. A glance at the federal budget shows immediately that most people have very little understanding of where the wealth goes and virtually no control at all over how it is used. There is an alternative
Portfolios of the Wealthy ($1,000,000 or more Percentage value of Portfolio Components) From the U.S. Federal Reserve Life Insurance 8% Business Interests 24% Stock & Bonds 22% Real Estate 27%
Benefits of Planned Giving To your donor Make a gift and retain income, sometimes increased, sometimes tax-advantaged income. Income often related to gift value instead of earnings. May sometimes negotiate the rate of income. May defer income. Avoid various taxes income/gains/estate/etc. Can maximize gifts by minimizing net cost.
Remember, Planned Gifts can increase cash/current gifts If their gift was a split-interest gift, they may have increased their cash flow which may be available for continued/increased current gifts. No one cares more about the success of your organization than someone who has just made a large gift commitment. This person has just positioned him/herself for lots and lots of personal attention.
Why this is good for you Now you can talk to someone about something more than just cash gifts. Makes you look smarter. And, you are. These gifts are usually whoppers. Let s face it, you weren t going to be able to get these gifts (the $$$) any other way. Because these are often whoppers, you can sometimes get some terrific promotional value from them.
So, why do donors like Planned Gifts? Donors can be a part of bigger purposes and projects than ever before expected. They can often also make these gifts work for themselves at the same time Increase income, Defer income, Secure specialized deductions, Avoid certain taxes, Pass certain assets to heirs in tax favorable manner Relate charitable and financial objectives together
So, it s a good idea, right? In fact, it can actually help your annual fund, right?
Let s see how these things work. An overview of some Planned Giving vehicles.
Bequests
Bequests Summary and Benefits Everyone understands a will; easiest planned gift vehicle. No charitable income tax deduction for the donor because it is a revocable gift. But, it is deducted from the estate, therefore, no estate tax. Donor may make a specific bequest, a residual bequest, a contingent bequest, or a general bequest.
Reasons anyone should write a will Distribute property as the individual desires instead of the state law. To protect the children Name specific items for heirs To distribute equally among beneficiaries To allow the donor s executor to truly represent his/her wishes rather than a courtappointed administrator To provide charitable gifts
Appreciated Securities
Appreciated Securities Summary and Benefits Donor gets a deduction for today s market value instead of what was paid for the security. The donor transfers the stock to your account through their broker. You should not accept securities that are not marketable.
Business interests/closely-held stock, etc.
Business Interests, etc. Summary and Benefits Very hard to put a value on closely-held stock. Who is the financial planner who will help in this process? Read everything related to this transaction.
Charitable Bargain Sales
Charitable Bargain Sales Summary and Benefits This works when you want some property the donor owns and you ask the donor to consider giving a deep discount on a sale (to you) of the property. Your organization pays the deep discounted price. Donor gets a charitable deduction for the difference between FMV and the discount. He/she also avoid CGTs on that amount.
Charitable Gift Annuities
Charitable Gift Annuities Summary and Benefits Next to wills, this is most popular vehicle. It is also the easiest vehicle to deal with. This is a contract, not a trust. Your organization assumes ALL the risk. Rates are set by ACGA (www.acga-web.org) Guaranteed fixed income to the donor. This gift is tax advantaged for the donor.
Deferred Charitable Gift Annuities Summary and Benefits JUST LIKE IMMEDIATE CGAs only the payment to the donor starts at a specified later date. Say to the donor: You can make a gift and receive guaranteed fixed payments for life. Deferred payments are higher than an immediate payment annuity as well as many securities and CDs. These plans are ideal to supplement other retirement income.
Charitable Remainder Unitrusts
How a Charitable Trust Works
Charitable Remainder Unitrust Summary and Benefits Most flexible life income gift available. It is a TRUST, not a contract, as CGA. Trust is irrevocable but charitable beneficiary may be changed if trust is written to allow it. Trustee has ALL the liability. (Who will that be?) Pays income beneficiaries a fixed percentage of the principle as revalued annually. If trust value increases, payments to beneficiary increase. If value decreases, payments decrease. Shorter trust terms and lower payout: best. Tax advantages: Income tax; CGT; Estate Tax
NICRUT and NIMCRUT Summary and Benefits Net Income Charitable Remainder Unitrust It only pays the income beneficiary what it earns, up to the percentage of the trust. If it earns nothing, it pays nothing. If the trust is 5% and it earns 2%, it just pays 2%. Period. Net Income with Makeup Charitable Remainder Unitrust It pays the income beneficiary what it earns, up to the percentage of the trust. Later, when economy and earnings are better, it makes up the previous losses. Makeups can be spread over time, or not.
Charitable Remainder Flip Unitrust Summary and Benefits Exactly like a NICRUT or NIMCRUT, except that a designated triggering event will flip this trust back to a regular CRUT with regular payments to the income beneficiary. For example: If trust is funded by real estate, there will be no income payments to you until the property is sold ( triggering event ) at which time the trust flips to a regular Charitable Remainder Unitrust (see previous screens).
Charitable Remainder Annuity Trust Summary and Benefits JUST LIKE CHARITABLE REMAINDER UNITRUST only the income to the beneficiary is a fixed dollar amount, based on a percentage (not less than 5%) of the initial value of the assets of the trust; will never vary. Say to the donor: Here is a great way to make a gift, receive fixed payments, and defer or eliminate gains tax. It provides a steady cash flow and can be more beneficial than keeping an asset or selling it outright.
Life Insurance
Life Insurance Summary and Benefits No term life insurance policies. Your organization must be the beneficiary AND OWNER. The donor gets a tax deduction (professional appraiser can determine the amount based on the interpolated terminal reserve value of the policy) and on future premium payments.
Real Estate
Real Estate Summary and Benefits Watch that your donor does not unload a property on your organization. There can be no deals for a buyer in the wings. No mortgage. Otherwise it could mess up the donor s tax advantages. It must be appreciated just like securities. Donor gets a charitable income tax deduction for FMV. Avoids CGT if he/she sold it; removes it from estate...
Retained Life Estate
Retained Life Estates Summary and Benefits Home, vacation cabin, or farm may be given with right to continue using it or living there. Investment property does not qualify. Donor, living there, does not pay rent, but is responsible for everything else from taxes to repairs. Again, this is not a property to unload on your organization.
Retirement Plans
Retirement Plans Illustration (ALL personal withdrawals are taxable) Estate Value Charitable Gift Value Assume a final balance $250,000 $250,000 Less Income Tax Income in respect of 87,500-0- Decedent (up to 35%) Net Estate/Gift Value 162,500 250,000 Less Estate Tax (up to 35%) 56,875 Net Disposable Balance 105,625 250,000 Note: $250,000 gift provision could cost as little as $105,625
Let s take a break!