Understanding Planned Giving Vehicles

Created By: Becca Bennett and Brandon Emerson
October 28, 2019

This is the final article in a three-part series on planned giving and the services Orr Group can provide to organizations looking to implement a proactive planned giving approach. If you have not read our other articles in this series, please reference: A Beginner’s Guide to Planned Giving or Proactive Planned Giving: Elevating Impact for Your Organization.

Over the next several decades, the largest and wealthiest generation in U.S. history will transfer $68 trillion to their Generation X and millennial children. Unless nonprofit organizations adopt a planned giving approach, 90% of donor mortality will result in lost opportunity.

Planned giving is important to any donor conversation, yet development professionals often feel uncomfortable broaching the subject or fear that this concept will take away from annual revenue. Planned giving should complement an organization’s fundraising efforts rather than replace them. In sophisticated development programs, planned giving can comprise up to 30% of annual philanthropic revenue.

An easy way to incorporate transformational planned giving into your donor conversations is through blended gifts – a combination of current and future giving. Your major donors are deeply invested in your organization and often would like to help more than their liquid assets allow. Bringing blended gift options to the table helps donors maximize their assets and allows them to elevate their impact.

There are a variety of planned giving vehicles that can be leveraged to bolster giving through blended gifts. As discussed in Proactive Planned Giving: Elevating Impact for Your Organization, Major Gift Officers do not need to be experts on how these giving vehicles are engineered. They just need the basic knowledge to introduce the concept to donors. Below, we’ve outlined the most common planned giving vehicles and how organizations have used these vehicles to foster transformational blended gifts:

1. Charitable Bequest

A charitable bequest is a gift to charity made at death through a donor’s will or trust. Bequests can be specified by gift amount or a percentage of the donor’s estate. Charitable bequests are appealing because they allow donors to leave a lasting impact on an organization with assets that only become liquid upon their death. This is the easiest vehicle to discuss with donors because organizations can provide simple bequest intent language to incorporate into a donor’s living will or trust.

On average, charitable bequests are more than two and a half times larger than a donor’s lifetime commitment. For example, an alumnus was recently approached about a seven-figure gift for a capital campaign conducted by his university. Though the donor had historically given six-figure gifts to previous campaigns, the university actively stewarded the family to identify their giving priorities and discuss opportunities for a blended estate gift. Through a cash commitment and irrevocable bequest, said donor was able to make a $1M pledge, and establish a scholarship that will live on in perpetuity under the school’s endowment.

2. Charitable Gift Annuities

Charitable gift annuities provide immediate tax benefits and a regular source of income to the donor. A charitable gift annuity is a gift vehicle engineered by a contract, whereby a donor transfers cash or property to a charity and in turn, that gift is invested by the charity recipient. In return, the donor receives a lifetime stream of income through the harvest of the investment, and a partial tax deduction at the time of the gift. The terms of the gift agreement lock in the rate and timing of investment payments, and the remaining balance of the investment is bequeathed to charity upon the donor’s death.

Charitable gift annuities are more common for larger organizations, such as universities. For example, a 55-year-old donor who gives $500 per year established a charitable gift annuity for his alma mater through his estate. The donor receives an annual installment through this investment, and the organization will utilize the corpus when the donor passes. When considering charitable gift annuities, it is important to evaluate the value of the investment and the average remaining lifetime of your donor. The gift must be significant enough to justify payments received during the donor’s lifetime. Charitable gift annuities do not make sense for every nonprofit and should not be discussed unless they are approved per the organization’s gift acceptance policy.

3. IRA Charitable Rollover and Gifts of Stock

As of December 2015, the IRA charitable rollover was signed into permanent law. This model allows taxpayers age 70½+ to transfer up to $100,000 directly from their IRA to charity. This benefits a donor because they do not need to transfer income to their private account to make a gift to charity, and the transfer from a donor’s IRA directly to charity allows them to make the gift tax-free.

Similarly, gifts of stock, bonds, or mutual funds can be a tax efficient way for donors to support your organization. Rather than paying tax when donors sell appreciated stock, they can use this asset to make charitable donations directly to nonprofits. Donors receive a federal tax deduction for gifts of stock based on the assets fair market value on the date of the gift. These giving models are great vehicles for Major Gift Officers who have difficulty discussing donor mortality to incorporate into conversations. Beneficiary designations are easy to implement from a donor perspective, and once completed the donor simply needs to notify their bank/broker for gift execution.

4. Life Insurance

Gifts of life insurance can be made on life insurance policies that are currently owned with a transfer of ownership, established with a charitable beneficiary, or purchased by charity on a donor’s life. Most commonly, gifts of life insurance are transferred to charity when the policy is no longer needed for its original purpose. In these instances, the donor is putting an idle asset to work, and funding a larger, future gift. Additionally, if premiums are paid, the benefits to the nonprofit are guaranteed.

When a policy is established on behalf of charity, the donor is entitled to an income-tax charitable deduction for the net premiums paid and the value of the policy, plus any premiums they pay after the transfer of ownership. The benefit of life insurance gifts is that at the donor’s death, proceeds from the policy paid promptly are not subject to the probate.

Using the giving vehicles outlined above, development officers can empower donors to think more broadly about what their gifts can accomplish. Through appropriate stewardship, there is an opportunity to increase the cash gifts received from legacy donors during their lifetime. Incorporating planned giving into your donor conversations allows donors to leave legacy behind and secures the financial health of your organization.