Planned giving can increase your funding and give your organization some peace-of-mind. Offering supporters the option of planned giving is a good thing for them, and a good thing for your organization too. Some planned giving strategies are more complex than others so below is a brief look at just 2 of the planned giving methods. Tomorrow’s post will explore the remaining 3 methods. Your accountant can review further details on planned giving to help you establish a program for your organization.
Today, let’s take a look into Life Insurance and Charitable Remainder Trusts (CRTs).
Life Insurance
Funds from life insurance are paid out over a long period and carry a specific value. An individual can use these funds to finance an endowed scholarship or other capital expenses.
A benefactor who donates an insurance policy to your organization receives an income tax deduction. This policy must name your organization as the owner and beneficiary and thus remove ownership from the donor. Also, funds can be deducted if they are ear-marked to purchase a policy on the donor’s life. In this instance, your organization is the owner and beneficiary of the policy.
Notes:
To use as a tax deduction, the donor must transfer ownership of the policy to your organization.
If the policy is not paid-up and needs additional payments, donors cay designate cash or property to your organization for the premiums, or provide premium payments on your behalf to the insurer Charitable Gift Annuities (CGAs.)
CGAs entail a simple unsecured agreement between a donor and your organization. This agreement states that the donor gives an award to your organization in exchange for your agreeing to pay annuity installations of a specific amount to the donor for the rest of his or her life. Each annuity remittance includes a taxable and non-taxable part.
This gives the contributor a steady income stream that is only partly taxed.
Here are some thoughts on CGAs:
The insuring agency can establish CGAs for up to two persons.
Annuities are established for life. They are not made for a set number of years, or for a minimum or maximum number of payments.
The American Council of Gift Annuities publishes annuity rates related to current economic circumstances. Some states require using these annuity rates.
If your donors offer property, land or stock to a CGA, your organization could incur selling costs.
When more generous gifts come to your organization, the contribution options become more complicated.
Charitable Remainder Trusts (CRTs)
In a Charitable Remainder Trust (CRT) a benefactor makes a donation to an irrevocable trust. The trust pays a designated income beneficiary for the remainder of the donor’s life or for a certain number of years, the “trust term”. After the trust term ends, one or more charitable organization can receive the remainder interest in the trust.
Here are some thoughts on charitable trusts:
Those who donate to the trust gain an income tax deduction equal to the current value of the charitable remainder beneficiary’s subsequent interest in the trust.
The IRS does not tax trust earnings except for unrelated business taxable income (UBTI), which is taxed at a rate of 100%.
The IRS taxes income beneficiaries on their distributions.
Regulations permit gift tax and estate tax deductions.
The IRS requires that the CRT use the calendar year as its tax year.
Payment options include:
Fixed (annuity) amount (CRAT) – Income recipients get the same pay-out every year except the first and last year, when the amount is prorated. Additional donations are not permitted.
Fixed percentage (unitrust) amount (CRUT) – Income recipients get a fixed percentage of a variable value. State regulations dictate those who manage the trust assets revalue them each year, and assign a fixed value to that year’s payout. Additional donations are permitted. Fluctuations in state trust laws limit the trust distributions to the lesser of the fixed percentage amount or the trust’s net income.
The trust payout rate must be at least 5% and no more than 50% of the value of assets initially transferred (in the case of a CRAT) or at least 5% and no more than 50% of the trust assets as revalued annually (in the case of a CRUT).
Regulations set the term on the date of funding, or for a term less than 20 years.
The current value of the charitable interest on each contribution must be at least 10% at the time of the contribution.
Planned giving is a program that fits the needs
and desires of many donors.
These donations can strengthen your fundraising and make it easy for benefactors to stay involved with your mission. Let your supporters know that you have a planned giving program in place. Promote it and its advantages to the donors. Get the word out about having planned giving available for donors.
Keep in touch with our blog. We have ideas to share and solutions to management and organizational questions. If you have questions about any other not-for-profit industry topics, contact our not-for-profit team leader at trent@tbfosteraccounting.com.
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