Planned (also known as deferred) gifts come as close to a sure thing as your nonprofit will ever likely encounter. They’re often more substantial than other types of donations and, because they specify an amount and date (or event, such as the death of the donor), they can help you secure your organization’s future with guaranteed revenue. Donors also benefit from the tax breaks and estate planning tools associated with planned gifts.
Menu of options
Here’s a summary of major types of planned gifts, their benefits and how they should be handled.
Direct gifts and bequests. This form of giving goes directly from a donor (or a donor’s estate, in the case of a bequest) to your organization. Generally, the bigger the donation, the bigger the tax benefit. Lifetime gifts of cash, property or other assets are usually fully deductible for income tax purposes as long as donors’ itemized deductions exceed the standard deduction and their donations don’t exceed adjusted gross income (AGI) limits. Direct bequests generally are 100% deductible for estate tax purposes.
Charitable gift annuities. These vehicles, available in most states, can be a good fit for people who want to donate substantial assets, minimize taxes and retain a consistent income flow during their lifetimes. Your nonprofit receives money, securities or real estate and in return agrees to pay the donor a fixed income for life. Contributors can defer any capital gains on appreciated property given to you, recognizing gains only as they receive annual payments. Meanwhile, a portion of each payment is defined as a tax-free return on principal. Also, donors can claim an income tax deduction equal to the present value of the charitable interest the year the annuity is set up.
Charitable lead trusts. With a charitable lead trust (CLT), the contributor donates assets to a trust, which pays income to the charity for a number of years. Then the property reverts to the donor or a beneficiary. The donor receives a gift or estate tax deduction (depending on whether the trust is funded during life or at death) equal to the present value of the charitable interest when the CLT is set up. Depending on the CLT’s structure, the donor also may receive an income tax deduction.
Charitable remainder trusts (CRTs). Here the donor receives income from the donated assets for a specified period, or for the life of the beneficiary, and the remainder goes to the charity. As with a charitable annuity, donors can defer capital gains on certain long-term appreciated property given to the CRT, recognizing gains only as they receive annual payments. They receive a gift or estate tax deduction equal to the present value of the charitable interest when the CRT is set up and, if it’s set up during life, also receive an income tax deduction.
Donor advised funds (DAFs). These funds enable donors to make charitable gifts when they choose and to participate in directing the funds. Contributors can create a DAF in their name, held by a nonprofit organization that administers the funds and makes grants. DAFs are designed to broadly benefit a variety of charities and are less costly to set up than a private foundation.
Supporting organizations. Some donors who want more, but not necessarily direct, control over how funds are used create supporting organizations. The chosen charities typically handle the organizations’ tax-filing and administration costs. Donors can deduct contributions up to a higher percentage of AGI than allowed for private foundation contributions.
Private foundations. Foundations typically are the vehicle of choice for donors who want to make contributions of $1 million or more annually, or who want full control over how funds are used. Foundations must file income tax returns each year and pay a 1% or 2% excise tax on net investment income. They also must bear administrative costs and make required minimum payouts annually.
Put your program in place
If your nonprofit hasn’t yet established a planned giving program, consider doing so. It costs virtually nothing to set up and requires no formal legal paperwork. However, staffers will need to be knowledgeable about planned giving so they can work effectively with donors and their advisors. Make sure donors work with financial and tax professionals when using planned giving vehicles.
BPM for Nonprofits
BPM is one of the largest California-based public accounting and advisory firms, ranked as one of the 50 major firms in the country. With six offices across the Bay Area, we serve emerging, mid-cap, and closely-held businesses as well as high-net-worth individuals in a broad reach of industries. Our Nonprofit services group consists of over sixty professionals who employ a full-service approach to accounting for nonprofits. One of our founding goals was to make a significant difference in the way nonprofits were served by those in our industry. We assist with auditing and tax preparation, consulting, outsourcing, technology, and investment consulting. For more information, contact Daniel Figueredo at (415) 288-6284 or Shannon Winter at (408) 961-6308.