Interested in making a donation to a nonprofit? The following are the four primary methods donors use to support causes they value while adding meaning and purpose to their own legacies.
1. The Outright Gift. If you write a check, give some clothing, or transfer some stock to a nonprofit, you are making an outright gift. This is by far the most popular way for donors to give to nonprofit organizations.
Nonprofits love the outright gift because it provides resources they can put to use immediately, a critical need for most.
In addition, this method typically has low overhead costs and few administrative complications, financial liabilities, or requirements for specialized staff training.
Donors tend to choose the outright gift because it is easy to understand and appropriate for gifts of any size to nonprofits of any size.
The outright gift also brings donors the satisfaction of knowing that their dollars are going directly to work for a cause they believe in. They can see tangible results of their giving during their lifetimes.
Outright gifts also provide most donors with the full measure of tax deduction and tax avoidance for which they qualify.
2. The Bequest (and beneficiary designations). Donors can create a bequest by putting a paragraph of instructions in their will.
They can accomplish much the same result by adding the name of their nonprofit to their IRA or life insurance policy beneficiary form. At the end of the donors’ lives, the designated nonprofits receive these gifts as specified.
For many donors, the most important advantage of a bequest is that it allows them to retain their assets until the end of their lives—ensuring their funds’ availability should they need these assets to meet unexpected crises.
Donors also like the bequest because it can be kept confidential. This is important for those who wish to remain anonymous and not become candidates for ongoing fundraising efforts. Many donors like the idea that they can easily change their bequests should their area of primary interest change.
For the small percentage of donors whose estates may be subject to estate taxes, the bequest by will is an effective way to reduce such taxes. This option works for any amount of money. Because IRA funds that remain in a donor’s estate will likely be subject to a high income-tax rate, these funds also make tax-effective end-of-life gifts.
Bequests tend to be quite large. This is logical since, with a bequest, donors are freed from the sense of constraint they might feel in making a large gift during their lifetime.
Another advantage for both donors and nonprofits is that bequests typically entail no significant costs that might diminish the actual amount received by the nonprofit: If a donor bequests $25,000, the nonprofit will get $25,000.
Although bequests are not tax deductible during the donor’s lifetime, for many donors, the advantages often override this tax-deduction disadvantage.
3. Life Income Gifts. The two most common options for life income gifts are the charitable gift annuity and the charitable remainder trust.
Life income gifts are simple in concept. The donor gives money or another asset to the nonprofit today, and the nonprofit owns and manages this money until the donor’s death, while paying out an annual fixed payment (typically) to the donor or a designated beneficiary.
With CGAs and CRTs, the nonprofit gets the funds that remain after the donor’s death. As logic would suggest, the more financial benefit the donor gets, the less benefit the nonprofit gets.
Life income gifts are typically deferred gifts. With some exceptions, the nonprofit gets to spend the money only after the donor’s death. With very few exceptions, the donor cannot change the arrangement once it has been made.
The CGA is relatively straightforward; it is more complicated than a bequest, but simpler than a gift trust. The arrangement is bound by a simple contract. The payout is guaranteed by the assets of the nonprofit.
The donor gets a tax deduction at the time the gift is made, based on the true gift amount of the asset—but not on the portion that is slated to be returned to the donor as part of the lifetime payout.
Many donors like the CGA. They are pleased that their cash flow will increase and that they will have guaranteed income for life. They will typically enjoy an immediate (although partial) tax deduction, and their nonprofit will get whatever money is left over when they die.
Gift trusts (CRTs and their many variations) and other split-interest instruments are not simple.
Because these trusts represent a world of technical complexity, with many variations and exceptions, a detailed exploration of them is best left to those who might feel these options are appropriate for their situations. The adviser community can provide a wealth of information on these arrangements and on the full range of split-interest gift techniques.
A gift trust may be the right method when a potential donor has a strong charitable intent, is without heirs who need an inheritance, and has significant assets tied up in an illiquid property that does not generate enough (or any) income.
A gift trust might provide the donors with a significant increase in income while providing the charity of their choice with a greatly enhanced gift, given that capital gains and estate tax “savings” would go to the nonprofit in the form of a larger gift, rather than to the IRS as a tax payment.
Gift trusts are often proposed at minimum levels of $100,000 or even lower. The minimums at many commercial-trust companies, however, are in the $250,000–$400,000 range.
4. The Family Foundation. A family foundation is a separate financial entity established to hold, manage, and distribute gifted assets. It is the most complex means of giving, somewhat akin to managing a small business. It lets the donor establish a legacy that will remain in perpetuity.
People also set up foundations to provide a learning and relationship-building experience for family members.
Some donors like that the family foundation lets them retain a high degree of administrative control, but others may not enjoy that level of involvement. The family foundation carries with it the responsibility to adhere to a large body of government regulations.
With a family foundation, the donated assets remain intact and generally grow over time. Annual distributions are made over time, generally at a minimum level of 5 percent of trust assets per year.
Source: Robert Livingston, Colorado Planned Giving Roundtable
Questions for Donors to Ask Themselves
• What are my values and objectives? What causes do I feel strongly about? What do I want to accomplish with my giving? What giving methods can best help me achieve my charitable goals?
• When do I want to give money—now or at the end of my life?
• When do I want my nonprofit to be able to spend the money that I give—now or at the end of my life?
• How engaged in the process do I want to be? Am I comfortable with more paperwork, more tax forms, and more consultations with my lawyer, accountant, and financial adviser? Or would I prefer to just give money to a cause that I believe in (now or at my death) as simply and economically as I can?
• Do I seek to gain financial advantage by giving money away? Do I look to my nonprofit for advantageous financial products?
• What true net advantage is there to me (or to my nonprofit) in giving away money through one of the more complex methods as compared with the outright gift and the bequest?