What Is Planned Giving and How Does It Work?

What is planned giving?  Well, it’s just like it sounds – a plan, made by you, to contribute a gift to a nonprofit organization that will extend beyond your lifetime. That gift could take a number of forms; it might be a life insurance policy, personal property, real estate, or cash. Planned giving also is called “legacy giving” – and that’s an apt term too, since it offers you a chance to have a say in what your financial legacy will be. Essentially, you are making the decision now to give money or property away later. If the recipient is informed in advance, it can prepare for what might be a mission-altering windfall.  

What are the benefits of planned giving?   

Of the surprising number of benefits that stem from gift planning, not all go to the recipient. The donor can find personal and financial rewards, and the donor’s heirs can benefit. Indeed, society as a whole gains from the good works supported by philanthropy. Let’s look at some of the benefits.  

To the donor   

With careful planning, donors can achieve financial goals, but also retain some say into the way in which his or her bequest will be used. Here are some of the potential benefits for the donor.  

Legacy 

You might accomplish something in death that you weren’t able to, in life. We all hope to leave a legacy, even those of us without huge savings.  Whether we choose to leave that bequest in honor of a family member or to create our own legacy, our gift can matter. Through planned giving, we get to choose where it will go, allowing us, perhaps, to fulfill a wish in death that we weren’t able to, in life. 

Involving the next generation 

You may choose to establish a foundation, offering purpose to your heirs who might run it upon your death.  You might want to pass along a set of values – perhaps the support of a specific organization – to your heirs.  In that case, you might choose to set up a foundation that they will run in your stead, upon your passing. 

A measure of control 

You can have more control over how your donation is applied, in the world. It’ll help you rest easy if you know that you have some control over where your money will go and what it will be used for.  A planned gift is part of a larger contract – like your will. You can use that document to describe how or where you want that donation to be used.  If you are giving to a university, say, you can choose to support either its academic or its athletic programs, or the university’s entire mission.  It’s up to you.  

Part of estate planning 

You can take advantage of the financial benefits of charitable giving on the amount of estate taxes to be paid by your heirs. Let’s face it – it’s nice to be able to offer our heirs some security. Planned giving can help. If you have a large estate, the estate might owe federal taxes upon your death.  For 2022, any amount above $12.06 million can be subject to the federal estate tax unless. For a married couple, the tax would apply to the remainder of an estate above the $24.12 million exemption. But with proper planning, your gift of cash or another asset (say, your stocks or IRAs, a boat or a car, or real estate) can be deducted from the estate’s value, which will reduce estate taxes for your heirs.

Capital gains taxes 

You can save on capital gains taxes through planned giving. Property like real estate and stocks that has appreciated over time can be given to charitable organizations without paying capital gains taxes. The donor can also receive a deduction for the full market value of the asset. The use of trusts and other estate planning tools can bring similar tax benefits.  

Recognition 

Major donors can see their name on a university’s new stadium or have a research program named after them. But charities offer public acknowledgement and special events to thank donors (and encourage prospective donors) at many levels of giving. Donors of planned giving might be invited to join a legacy society within the organization. (It should be noted that planned giving can change as donors change their wills.)  

Benefits to the recipient   

Planned gifts are a boon to the receiving organizations. Legacy gifts are generally larger, and it doesn’t cost the charity much to bring them in. That is why planned giving usually offers nonprofits the best return on investment (ROI) of all the various types of fundraising. Here’s how.  

  • Planned gifts are generally at the top of the donor pyramid. The “donor pyramid” is a way for charities to envision the levels of their support. Occasional gifts, like money in the kettle or a response to a fund drive, are the base. The tend to be large in number but small in amount. Then come commitments to the annual fund and other regular giving, and then major gifts. Legacy giving tends to be the largest and rarest of gifts. Even one legacy gift can overshadow all the others.   
  • The charity may find that a gift is mission-altering in size. Every now and then, a charity catches the heart of a potential donor. Perhaps it’s someone whose volunteer hours or outright gifts were duly appreciated. But it is only upon the donor’s death that the charity realizes that it has been left a bequest that moves it up to the next level. Planned giving often opens many doors for an organization, including capital purchases, hiring and setting up marketing efforts to find more donors 
  • A planned gift can allow the charity the ability to make long-term plans. If an organization knows that it’s going to receive a bequest, it can plan and take the best advantage of it.  

How does planned giving work?   

So, let’s assume that you have decided that you would like to do some good in the world (and perhaps shelter some of your heirs’ inheritance) via planned giving. How do you start?  

First, choose the recipient or recipients. Perhaps you have a dearly held alma mater or a treasured nonprofit group that does good work in your community.  (And perhaps that nonprofit already has a planned giving program.) 

Next, decide on the amount you’d like to give, considering the size of your estate.  

Finally, meet with a wealth advisor to consider your options among the types of planned gifts: a trust, a foundation, a one-time grant, or another method.  

Decide on the form of your giving   

There are three main types of gift plans, and many estate and tax planning tools at your disposal.  You might choose to offer a gift of an asset that has appreciated, instead of cash. You might choose a gift that will return income to you, for the rest of your life, in return for your contribution.  Or you might plan a gift that will be payable to the nonprofit upon your death.  Each method offers different advantages, and you’ll want to choose the right gift for your estate plan. Let’s look at three specific methods of giving.  

Bequests  

Bequests are, perhaps, the simplest way to make your planned gift.  To make a bequest to a charity, you will earmark a portion of your estate to be given to a charitable organization. You can do this by allocating a specific amount of cash (say, $5,000), by donating a portion (perhaps 5%) of your total estate, or by donating whatever is left in your estate after all your other bequests have been allocated.  Bequests don’t generate a cost to the donor during his/her lifetime.  

Annuities 

Annuities operate a bit differently.  With a charitable gift annuity, for example, the donor gives the nonprofit an irrevocable gift – perhaps cash or securities.  And in return, the nonprofit promises the donor a fixed-income payment, either for a prescribed length of time or for the rest of his/her life.  When the donor passes on (or when the length of time of the annuity has passed), the nonprofit gets to keep whatever remains in the fund.  

Trusts 

There are two main types of trusts to choose from.  

When using a charitable remainder trust, the donor places cash or securities into a trust and receives a tax deduction on the market value of the asset. The donor receives income from the trust for a set number of years or until death. Then the remainder goes to the charity. This type of trust allows donors to make a major gift, even as they ensure that they or their beneficiaries will receive income while they are alive. 

With a charitable lead trust, which is less common, an irrevocable trust is set up to send income to a charity for a certain period. The donor gets tax benefits for the donation. When the period is over, the assets go to the beneficiaries of the donor.   

In conclusion   

Most of all, your decision about planned giving is about your legacy.  Your gifts will serve as a symbol of your priorities and of where you have chosen to place your energy. Recent research has shown that about 8% of donors in the U.S. above the age of 50 will make a planned or legacy gift to a charity. Will you be one of them? The tax and estate planning experts at Cope Corrales can help you navigate the waters, to the benefit of your estate, your chosen charities, and your heirs. 

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