We get back to the fundamentals today. A special thanks to Stelter’s Senior Gift Planning Consultant, Lynn M. Gaumer, J.D., for offering her insights about planned giving terms every development professional should know.
Consider this potential gift scenario. You are working with a donor who is considering using their RMD to make a QCD from their IRA next year. In your recent Zoom meeting, they indicated they are concerned about market fluctuations and may prefer secure income for life, which means establishing a CGA or CRT. But with interest rates at historic lows, they could decide to establish a CLT instead. Or perhaps they’ll decide to keep it simple and recommend a grant from their DAF.
Whew! That’s a lot to take in. Now let’s figure out what that all means.
Let’s start with the big picture.
WHAT IS PLANNED GIVING?
Or gift planning? These are very much industry terms, so your donors may not recognize them. According to Dr. Russell James, J.D., Ph.D., CFP® and professor at Texas Tech University, only about 20% of individuals recognized the term “gift planning” and about 12% recognized the term “planned giving”. Planned gifts (aka legacy gifts, deferred gifts and estate gifts) are essentially major gifts that donors plan for, that are made either during or after their lifetimes and that provide financial support to nonprofits of their choosing.
For some donors, this is considered the “ultimate gift”, as it’s much more emotional than writing a check. Some gift vehicles provide immediate support, such as gifts of cash or marketable securities, where donors can witness the impact of their giving. Others provide future support, such as a gift in a will or trust or a beneficiary designation, while others provide lifelong income to the donor plus a future gift.
COMMON ESTATE PLANNING TERMS
The person or organization designated to receive benefits or funds under a will, trust or other asset, such as a life insurance policy or retirement plan.
Lynn’s Tip: Make sure you encourage your donors to notify you if your organization has been named a beneficiary. Otherwise, those good intentions may be lost. Many people and nonprofits aren’t aware that a policy exists or that they have been named to receive a gift.
A gift in a will or living trust is the most popular way to leave a legacy. The most common types of charitable bequests are:
- Specific—A gift of a specific item to a specific beneficiary. If you no longer own the item (e.g., golf clubs) after your lifetime, the bequest fails, and the beneficiary cannot claim other property or the cash value.
- Residuary—A gift of all the “rest, residue and remainder” of your estate after all other debts, taxes and bequests have been paid. Most attorneys agree this is the preferred bequest method to ensure beneficiaries receive the proportions you intend.
- Unrestricted—This is a gift to be used for general purposes, without conditions attached; it’s especially useful for charities because it allows them to use the gift for their most urgent purposes.
- Honorary/Memorial—A gift made in honor of or in memory of someone.
Lynn’s Tip: Be straightforward and use plain English. Dr. Russell James recommends using terms that encourage interest in planned gifts. The term “bequest” does not always resonate with donors. You may want to refer to a charitable bequest as “a gift” in a will or trust.
A legal document that modifies an earlier will.
Executor or Personal Representative
The person named in a will or appointed by the court to manage the estate. (State laws vary on which term is used.) This person will collect the property, pay any debt and distribute property or assets according to the will.
A written legal instrument created by a grantor/trustor for the benefit of himself or herself (during life) or others (during life or at death). Investments used to fund trusts typically include cash, marketable securities and real property.
DID YOU KNOW? A trust can last up to a specified date or until a particular event occurs—the date a child reaches a particular age, for instance, or when the amount in the trust is too small to administer.
An individual or institution entrusted with the duty of managing property placed in the trust.
A legally executed document that directs how and to whom a person’s property is to be distributed after death.
DID YOU KNOW? According to a recent study by Caring.com, 68% of Americans over age 18 don’t have will. Will planning, however, is a smart choice for everyone, regardless of age or assets.
Retirement plan assets
The largest and most valuable assets many people own. These include 401(k)s, 403(b)s and IRAs. They remain taxable when distributed to a beneficiary but are tax-free when given to a nonprofit organization.
Lynn’s Tip: Encourage your donors to make a gift to your organization from their retirement plan assets and leave less heavily taxed assets, such as life insurance, securities and real estate, to their loved ones.
ADDITIONAL FINANCIAL TERMS TO KNOW
Property such as real estate or stock that has increased in value.
The original value of an asset, such as stock, before its appreciation or depreciation.
Now for a Little Alphabet Soup
The Coronavirus Aid, Relief, and Economic Security Act is a $2 trillion economic relief package that provided immediate help for taxpayers and nonprofits as a result of the COVID-19 pandemic and subsequent economic downturn. Congress recognized the critical need facing the nonprofit community and included provisions that expanded charitable giving incentives.
With a charitable gift annuity, donors make a gift of cash, securities or other property to the nonprofit of their choice, which then agrees to pay them a set amount for life. The payout rate is determined by the donor’s age and the age of any other person who is named to receive the payments at the time of the gift.
Lynn’s Tip: Approximately 97% of organizations use the suggested maximum rates of the American Council on Gift Annuities. If your organization is unable to offer gift annuities, consider working with a third party such as the Charitable Giving Resource Center or the National Gift Annuity Foundation.
A charitable lead trust is an irrevocable trust designed to provide financial support to one or more charities for a period of time, with the remaining assets eventually going to family members or other beneficiaries. A charitable lead annuity trust is more attractive when interest rates are low.
Charitable remainder trusts pay to one or more individuals each year for a term of years (not to exceed 20) or for life, with the balance of the trust property going to charity thereafter. They work in a similar way as a charitable gift annuity but are more flexible in terms of rates, number of beneficiaries and the right to retain power to change remainder beneficiaries.
The charitable midterm federal rate is also known as the IRS discount rate or Section 7520 rate. It is the interest rate that is used to determine the charitable deduction for many types of planned gifts, such as charitable remainder trusts and gift annuities. The CMFR hit an all-time low in June 2020 of 0.6%.
A donor advised fund is like a charitable savings account set up by the donor but managed by a nonprofit, community foundation or the charitable arm of a financial institution. Donors contribute to the account, which grows tax-free, and can recommend the size and frequency of grants from that fund to a particular organization or other nonprofits.
Lynn’s Tip: Many DAF owners are using their funds to respond to COVID-19. National Philanthropic Trust recently reported that the number of grants made in March rose 39%, and the value increased 120% from the same time in 2019. If you haven’t started asking for gifts from donor advised funds, you need to implement a marketing strategy ASAP.
An individual retirement account is an account set up at a financial institution that allows an individual to save for retirement with tax-free growth or on a tax-deferred basis.
A qualified charitable distribution is specifically reserved for donors who are 70½ and older. An IRA owner may make a gift directly to a qualified charitable organization of any amount up to $100,000 per year. These gifts are excluded from gross income and count toward a donor’s required minimum distribution when that individual reaches age 72. This gift is beneficial regardless of whether the donor itemizes his or her taxes.
A required minimum distribution is the minimum amount that people age 72 and older must withdraw from their account each year. Notably, individuals who turned 70½ in 2019 or earlier continue to take required minimum distributions. The CARES Act waived required minimum distributions in 2020.
The Setting Every Community Up for Retirement Enhancement Act went into effect on Jan. 1, 2020, and marked the most significant changes to retirement security in over a decade, yet also impacted the charitable giving sector.
Did you know all the terms, abbreviations and acronyms? Did you learn anything new? We’d like to help make your job and your planned giving team’s jobs a bit easier with our useful comparison chart. Download it and see what you think.