The term “planned giving” refers to charitable gifts that require some planning before they are made. Planned gifts are popular because they can provide valuable tax benefits and/or income for life.
Potential Benefits of Planned Gifts:
Make significant donations to a charity that is important to the donor
Increase current income for the donor or others
Reduce the donor’s income tax
Pass assets to family at a reduced tax cost
Many gift options are available, and the purpose of the SETP Scholarship Foundation Planned Giving Program is to assist donors in carrying out their wishes by providing appropriate information. The SETP Scholarship Foundation’s planned giving representative does not offer legal or tax advice or interfere with a donor’s own financial advisors.
GIFTS OF CASH - An outright gift of cash to the Foundation provides an immediate tax deduction for the donor and allows the Foundation to immediately invest the gift to support current and future scholarships.
GIFTS OF APPRECIATED SECURITIES - A gift of appreciated securities provides great tax benefits without affecting current cash flow, and also provides the donor with a dual tax incentive. When securities that have been owned for more than a year and have appreciated in value since purchase are donated, the giver is usually entitled to an income tax deduction for the full current value of the asset, not just the cost basis. The donor also bypasses any capital gains tax that would have been due had the property been sold.
BEQUEST THROUGH A WILL - Many gifts by will are made by persons who first provide for their loved ones and then choose to leave the remainder of their assets to charitable interests that have been an important part of their lives, such as SETP. Even a small portion of a typical estate can be a very meaningful gift when received. The donor’s estate will receive a charitable estate tax deduction upon the donor’s death.
Many donors simply designate a percentage of their estate to go to the charitable organization of their choice. Others name a specific dollar amount. Still others choose to leave whatever remains (residuary bequest) in the estate after other heirs are provided for.
Characteristic language used for a bequest through a will is as follows:
SPECIFIC BEQUEST: “I give, devise and bequeath to the SETP Scholarship Foundation, Federal Tax ID 95-2479396 , a 501( c) (3) nonprofit organization headquartered in Lancaster, CA 93584-0986 , $______ (or a specific asset) to be used for its general use and purposes.”
PERCENTAGE BEQUEST: “I give, devise and bequeath to the SETP Scholarship Foundation, Federal Tax ID 95-2479396 , a 501( c) (3) nonprofit organization headquartered in Lancaster, CA 93584-0986 , ___% of my estate to be used for its general use and purposes.”
COMBINED SPECIFIC AND PERCENTAGE: “I give, devise and bequeath to the SETP Scholarship Foundation, Federal Tax ID 95-2479396 , a 501( c) (3) nonprofit organization headquartered in Lancaster, CA 93584-0986 , the greater of ___% of my estate or $___ to be used for its general use and purposes.”
RESIDUARY BEQUEST: “I give, devise and bequeath to the SETP Scholarship Foundation, Federal Tax ID 95-2479396 , a 501( c) (3) nonprofit organization headquartered in Lancaster, CA 93584-0986 , ___% of the rest, residue, and remainder of my estate consisting of property, both real and personal, wherever situated, which I may own or be entitled to at my death, to be used for its general use and purposes.”
GIVING THROUGH RETIREMENT PLANS (IRA’s) - Millions of Americans have taken advantage of generous tax incentives provided by Congress to encourage savings for their retirement years. Known as “qualified” retirement plans, these options have traditionally featured income tax benefits at the time contributions are made. Amounts in traditional qualified plans are typically not subject to income tax until they are actually withdrawn by the owner of the funds. (The “Roth” IRA differs in that it features contributions of after-tax dollars, with tax-free withdrawals in future years).
Because they are included as part of the taxable estate at death, the assets in qualified retirement plans can also be subject to federal (and perhaps state) estate taxes. This would occur if, over time, accumulations in the qualified retirement plans cause the value of the estate to rise above mandated threshold levels and become subject to estate taxes. In addition, when heirs receive the balance from the qualified plan after estate taxes, income tax might also be due.
Rather than see retirement assets absorbed to such a high a degree by taxes, individuals can direct that such assets be used to make charitable gifts from their estates. This can result in more assets being received by the donor’s family than if charitable gifts were made from other funds in the estate.
Gifts to charities through retirement plans can be made by simply listing the charity as a beneficiary, or partial beneficiary on the plan. This can usually be done by merely filling out a form provided by the custodian of the retirement plan. Partial beneficiaries can be designated to receive a determined amount, a remainder, or a percentage of the fund.
Gifts to the Foundation through retirement plans should be discussed by the donor with their financial advisor, legal counsel, or qualified plan advisor.
CHARITABLE REMAINDER TRUST (CRT) - A Charitable Remainder Trust is established for the life of the donor and/or for the life of any beneficiary and is irrevocable. Once it is established, it cannot be changed. Income is paid to one or more parties and, at the end of the trust’s life, the principal and any undistributed interest is paid to a different party (charity). Charitable Remainder Trusts are generally administered through a financial institution.
The income period of the trust can be established for a specified period of time not to exceed twenty years, or for the lifetime of the beneficiary.
The income portion of the trust may be either an annuity income (Charitable Remainder Annuity Trust or CRAT) or a unitrust income (Charitable Remainder Unitrust or CRUT).
An annuity income is calculated in the trust agreement at the time it is established. It is a fixed amount of dollars based on the then market value of the trust. If the assets in the trust go up, the income portion does not.
With a unitrust, the percentage rate for income is established in the trust agreement. Assets of the trust are then revalued annually, resulting in fluctuating income amounts.
There are a variety of Charitable Remainder Trust options available with differing tax advantages, depending on the donor’s specific circumstances. These should be discussed by the donor with their legal counsel, or financial advisor.
CHARITABLE LEAD TRUST - This trust makes payments, either a fixed amount (annuity trust) or a percentage of trust principal (unitrust), to the Foundation during its term. At the end of the trust term, the principal can either go back to the donor (a grantor lead trust) or to heirs named by the donor (a non-grantor lead trust). A donor may claim a charitable income tax deduction for funding a grantor lead trust or a charitable gift tax deduction for funding a non-grantor lead trust. Since lead trusts are typically used to pass assets to heirs, non-grantor lead trusts are more common than grantor lead trusts. The Lead Trust option should be discussed by the donor with their legal counsel, or financial advisor.
LIFE INSURANCE - Some individuals who wish to include a gift to the Foundation in their estate plans use life insurance. The most basic reason for using life insurance to make a gift is that the costs during a person’s lifetime are low, and it is possible to leave a larger gift at death than would have been possible during life. The Foundation does not accept gifts of term life insurance.
Other advantages to using a life insurance policy to make a gift to the Foundation include the confidential and prompt transfers made outside of the probate process, upon death of the donor. To assign ownership of a policy or to name the Foundation as a beneficiary are simple procedures without cost. There are several ways to use life insurance to make a gift to the Foundation
1. Gift of an existing “paid up” policy. It is possible for the owner of an insurance policy with a substantial cash surrender value to find that the original purpose for the protection no longer applies. Perhaps the children have grown and established themselves, or the house is paid for, and this protection is no longer necessary. The policy then becomes a “hidden asset,” available for a desired philanthropic purpose.
2. If premiums on the policy are still payable, the donor may want to assign ownership of the policy directly, in which case the policy would normally be surrendered for cash. Or, it may be decided to accept an amount of paid-up insurance. In either case, the donor is relieved of the obligation to make further premium payments.
3. The donor may choose to acquire a new policy or keep a policy in force for eventual realization of the face amount. In this case, the donor would pledge to make unrestricted gifts at least annually, which will be used to pay the premiums. The gifts are tax-deductible, and the policy is kept in force with pretax instead of after-tax dollars for a lower actual cost.
Payments of the premiums directly to the insurance company are considered to be gifts “for the use of” the Foundation, instead of “to” the Foundation. In this case, the tax savings may be less beneficial to the donor, and should be discussed with the donor’s insurance agent or financial advisor.
There are other ways to use life insurance as a gift to the Foundation, and legal counsel, financial planner or insurance agent can advise a donor according to their specific circumstances.