Planned and Endowment Giving: The Case Philip M. Purcell, JD Ball State University Foundation ppurcell@bsu.edu Copyright 2012@All rights reserved. .

The Case for Planned Giving for your Organization

Sources of Gifts Sources of revenue for reporting public charities, 2008 Charitable giving in billions of $, 2010 Source: Urban Institute, National Center for Charitable Statistics, Core Files (2008) in Kennard Wing, Katie L. Roeger, Thomas H. Pollak, The Nonprofit Sector in Brief: Public Charities, Giving and Volunteering, Urban Institute, 2010. & Giving USA 2011.

Intergenerational Wealth Transfer 1998 2018 2052 WWII Generation Baby Boomers X&Y Estimated $20+ trillion will be transferred over next two decades As much as $6 trillion expected to be transferred to philanthropic purposes

Social Capital Gift planning can minimize taxes by increasing charitable gifts as “social capital”. Planned gifts offer unique opportunities to maximize support for charitable organizations during the wealth transfer!

Planned and major giving programs focus on gifts of assets … While annual giving programs focus on gifts of cash from annual income… Planned and major giving programs focus on gifts of assets …

Federal Reserve Information Released • February 2003 • Portfolios of the Wealthy ($1,000,000 or more. Percentage value of Portfolio Components) Federal Reserve Information Released • February 2003 • Other 3% Cash 5% Business Interests 24% Stock & Bonds 22% Life Insurance 8% Retirement Assets 11% Real Estate 27% Update, 5

Fundraising Pyramid: The Lost Symbol? Planned Gifts______________________ Major Gifts______________________ Increased/Repeat Annual Gifts_____ First Time Gifts_______________

Benefits of Planned Giving to the Nonprofit Increases available options of giving Planned gifts tend to be large gifts Acquire donors/assets not otherwise available Often produces “actual-received” gifts on a regular basis for operating expenses Often leads to increased future gifts through donor’s additional estate and charitable planning Sec. 1, 13

Benefits to Nonprofit Increases possibility of a donor moving a bequest to a lifetime gift May be irrevocable as well as revocable May be used as a basis for future planning Frequently have promotional value

How Planned Giving Stimulates Current (Cash) Giving No one cares more about the success of the charity than someone who has made a major/significant gift commitment Planned gift donors position themselves for nurturing and personal attention Those donors want to be informed of the successes and needs of the charity Planned gifts often increase the donor’s cash flow; may be available for current giving Sec. 1, 11

Current Use Planned Gifts Some planned gifts are designed to produce only current gifts, such as: Gifts of assets Charitable endowments Charitable lead trusts

The Case for Planned Giving for Donors

Definition of Planned Gifts (Partnership for Philanthropic Planning) Planned gifts are a variety of charitable giving methods that allow donors to express their personal value by integrating their charitable, family and financial goals. Uses variety of financial tools/techniques for giving and requires the assistance of qualified specialists. Utilizes tax incentives when appropriate.

Ethical Considerations Oversight by Congress, IRS, State Legislatures and State Attorney Generals Model Standards of Practice for the Charitable Gift Planner (Partnership for Philanthropic Planning) Model Code of Ethics for Nonprofit Organizations (Independent Sector) Code of Ethical Principles and Standards (Association of Fundraising Professionals)

A Donor Bill of Rights Introduction, 31 Philanthropy is based on voluntary action for the common good. It is a tradition of giving and sharing that is primary to the quality of life. To assure that philanthropy merits the respect and trust of the general public, and that donors and prospective donors can have full confidence in the not-for-profit organizations and causes they are asked to support, we declare that all donors have these rights: To be informed of the organization’s mission, of the way the organization intends to use donated resources, and of its capacity to use donations effectively for their intended purposes. To be informed of the identity of those serving on the organization’s governing board, and to expect the board to exercise prudent judgment in its stewardship responsibilities. To have access to the organization’s most recent financial statements. To be assured their gifts will be used for the purposes for which they were given. To receive appropriate acknowledgment and recognition. To be assured that information about their donations is handled with respect and with confidentiality to the extent provided by law. To expect that all relationships with individuals representing organizations of interest to the donor will be professional in nature. To be informed whether those seeking donations are volunteers, employees of the organization or hired solicitors. To have the opportunity for their names to be deleted from mailing lists that an organization may intend to share. To feel free to ask questions when making a donation and to receive prompt, truthful and forthright answers. DEVELOPED BY: American Association of Fundraising Counsel (AAFRC), Association for Healthcare Philanthropy (AAHP), Council for Advancement and Support of Education (CASE), Association of Fundraising Professionals (AFP). INITIAL ENDORSERS: Independent Sector, National Catholic Development Conference (NCDC), National Committee on Planned Giving (NCPG), National Council for Resource Development (NCRD), United Way of America. Introduction, 31

Profile of the Planned Gift Donor Loyal annual giver. Age 45 and up. The “Boomer” Generation. College education. Wealth – but remember that the planned gift may be the largest gift a donor may make!

Customized Planned Giving Charitable gift planning is a “customized” process to meet the unique estate planning goals of each donor. Donors decide important aspects such as: 1. Timing 2. Type 3. Assets 4. Use

With Gift Planning, the Donors Decide the Timing of Their Gifts Gifts may be contributed during lifetime (inter vivos gifts) or at death (testamentary gifts). Gifts may be motivated to reduce taxes during high income years such as sale of a business. Gifts may coincide with life events such as retirement, receipt of inheritances, loss of a loved one, marriage and special needs.

The Donor Selects Type of Plan 1. Gifts that Help Now: Outright Gifts, Endowments and Lead Trusts 2. Gifts that Help Later: Bequests in a Will or Trust plus Other Deferred Gifts such as Beneficiary of Life Insurance or Retirement Plans, Payments on Death, Remainder Interests in Real Estate 3. Gifts that Pay Income: Gift Annuities, Charitable Remainder Trusts and Pooled Income Funds

Donor Chooses Assets Used for the Gift Plan Gifts of appreciated assets such as stock and real estate allows the donor to escape potential capital gains tax. Planned gifts may convert non income-producing assets into a dependable source of lifetime income. Gifts with potential liability or unwanted donor restrictions may be declined.

Donor Recommends Use of the Gift Gifts can be contributed to the annual campaign, a special initiative, or an area of focus. Many planned gifts are designated for endowment. Be careful with restrictions – and review ahead of time!

Benefits of Planned Giving to the Donor Make a gift and retain income from gift property Maximize gifts by minimizing net cost Increase spendable income Negotiate the rate of income Income related to value instead of earnings Secure income in a tax-advantaged way Defer Income Secure a contribution deduction (income tax savings) Sec. 1, 15

Avoid capital gains tax Establish a tax-sheltered fund to enhance growth potential Tax-free diversification options Management options (Trusteeship) Incentive for comprehensive estate planning Gift, estate tax, and probate cost savings Relate charitable objectives to personal financial plan objective Satisfaction of a partnership in a worthy cause through a gift provision

Review of Tax Benefits for Charitable Giving The tax benefits for charitable giving are not a magical sleight-of –hand! We are very fortunate that Congress has provided a helpful array of incentives for many forms of philanthropy as incorporated into the Internal Revenue Code. Tax benefits are not the typical primary motivation for a gift – rather the mission and programs of charitable organizations usually inspire our philanthropy. However, tax incentives can greatly impact the timing, dollar amount, technique and assets used for a planned gift as this and future modules explain.

Basic Tax Benefits for Charitable Giving Income Tax Charitable Deduction Capital Gains Tax Saving Unlimited Gift and Estate Tax Charitable Deduction Income Tax Credit (available in some states)

Tax Information Personal Ordinary Income Tax rates: 10% - 35% Alternative Minimum Tax: 26% - 28% Corporate Income Tax: 15% - 35% Capital Gains Tax: Short Term (gain income from assets held one year or less) : 10% - 35% Long Term (assets held more than one year): 0% (if ordinary tax rate is 10% or 15%) 15% (if ordinary tax rate is 25% or greater. Update, 7

Estate and Gift Tax Rates Economic Growth and Tax Relief Reconciliation Act of 2001 and 2010 Tax Relief Act Calendar Year Estate Tax Death time Transfer Exemption and Generations Skipping Exemption Gift Tax Highest Estate And Gift Tax Rate 2004 $ 1.5 million $ 1 million 48% 2005 47% 2006 $ 2 million 46% 2007 45% 2008 2009 $ 3.5 million 2010 $ 5 million 35% (subject to opt-out election) 2011 $ 5 million (unified with gift tax) 35% 2012 2013 $ 1 million (unified with gift tax) 55%

Income Tax Charitable Deduction Donors may deduct charitable contributions of cash or property made to qualified organizations or for qualified purposes if the donor itemizes his or her deductions. Resource: IRS Publication 526, Charitable Contributions

Limits on Income Tax Charitable Deduction for Cash Gifts If a cash gift is made to a public charity (not a private foundation), the annual deduction limit is 50% of Adjusted Gross Income (AGI). Excess deduction (above the limit) may be carried over for five more years, using as much available deduction each year as possible.

Charitable Deduction Annual Limit for Non-Cash Gifts In general, if a property gift is made to a public charity, the annual deduction limit is 30% of Adjusted Gross Income (AGI). Excess deduction (above the limit) may be carried over for five more years, using as much available deduction each year as possible.

Not All Gifts Qualify for an Income Tax Charitable Deduction No deduction is allowed for some gifts such as: Volunteer time or services. Loan of property. Non-qualified partial interest gifts. Gifts to non-qualified organizations or purposes such as foreign organizations. Qualified recipients are listed in IRS Publication 78. Not all gifts qualify for an income tax charitable deduction. These attractive tax savings are not available for all types of important gifts. For example, no income tax charitable deduction is allowed for gifts of volunteer time or services, a loan (even if for free) of real estate or other property, a gift of property in which the donor retains legal ownership interests, and gifts to non-qualified organizations or purposes such as to foreign organizations. A list of charitable organizations that are considered qualified by the Internal Revenue Service is included in IRS Publication 78 available at the IRS website.

Key Take Aways 1. Planned Gifts are a way to give assets that is best done with thoughtful and ethical estate and charitable planning. 2. Planned giving must be integrated into a comprehensive fundraising program.