the secret to understanding planned giving

The Secret to Understanding

Planned Giving

Russell James, J.D., Ph.D., CFP®ProfessorTexas Tech University

The Secret to Understanding

Planned Giving

Part 1: The tools

Isn’t planned giving super-complicated?

Gift planning can do two things.

Fundraisers should use it for two reasons.

Financial advisors should use it for tworeasons.

Gift planning can do two things

• Lower taxes

• Trade gift for income

If gift planning can only do two things, how can it

get so complicated?

Trade for Income

Charity-BackedCGA

Immediate fixed $ payments for

life/livesImmediate CGA

Delayed fixed $ payments for

life/livesDeferred CGA

Donor Asset-Backed

CRT

Fixed $ payments for life or years

CRAT

Fixed % payments for life or years

CRUT

Capped at yearly income

NICRUT

With IOUs if income below fixed payment

NIMCRUT

Capped until event occurs

Flip-CRUT

Pool of Different Donors’ Assets

PIF

Trade for Income

Charity-BackedCGA

Immediate fixed $ payments for

life/livesImmediate CGA

Delayed fixed $ payments for

life/livesDeferred CGA

Donor Asset-Backed

CRT

Fixed $ payments for life or years

CRAT

Fixed % payments for life or years

CRUT

Capped at yearly income

NICRUT

With IOUs if income below fixed payment

NIMCRUT

Capped until event occurs

Flip-CRUT

Pool of Different Donors’ Assets

PIF

Lower Taxes

Capital Gains Taxes

Give appreciated

property

To charity in exchange for

incomeCRAT, CRUT, CGA, PIF

To charity

Income Taxes

Donor’s

Deduction for current gift

Deduction for committing to future transfer to charity

PF, DAF, Grantor CLT, Remainder Deed

Deduction for current gift in exchange for income

CRAT, CRUT, CGA, PIF

Heirs’ (retirement account

charitable beneficiary)

Estate Taxes

Give to charity at deathWill, CRT, CGA,

Remainder Deed

Fixed payments from

assets to charity, excess growth to heirs estate tax free

Non-Grantor CLT

Lower Taxes

Capital Gains Taxes

Give appreciated

property

To charity in exchange for

incomeCRAT, CRUT, CGA, PIF

To charity

Income Taxes

Donor’s

Deduction for current gift

Deduction for committing to future transfer to charity

PF, DAF, Grantor CLT, Remainder Deed

Deduction for current gift in exchange for income

CRAT, CRUT, CGA, PIF

Heirs’ (retirement account

charitable beneficiary)

Estate Taxes

Give to charity at deathWill, CRT, CGA,

Remainder Deed

Fixed payments from

assets to charity, excess growth to heirs estate tax free

Non-Grantor CLT

Lower Taxes

Capital Gains Taxes

Give appreciated

property

To charity in exchange

for incomeCRAT, CRUT,

CGA, PIF

To charity

Income Taxes

Donor’s

Deduction for current gift

Deduction for committing to future transfer to charity

PF, DAF, Grantor CLT, Remainder Deed

Deduction for current gift in exchange for income

CRAT, CRUT, CGA, PIF

Heirs’ (retirement account

charitable beneficiary)

Estate Taxes

Give to charity at

deathWill, CRT,

CGA, Remainder

Deed

Fixed payments

from assets to charity,

excess growth to

heirs estate tax free

Non-Grantor CLT

Trade for Income

Charity-BackedCGA

Immediate fixed $ payments for

life/livesImmediate CGA

Delayed fixed $ payments for

life/livesDeferred CGA

Donor Asset-Backed

CRT

Fixed $ payments for life or years

CRAT

Fixed % payments for life

or yearsCRUT

Capped at yearly incomeNICRUT

With IOUs if income below fixed payment

NIMCRUT

Capped until event occurs

Flip-CRUT

Pool of Different Donors’ Assets

PIF

Yes, it can get complicated.

But, it still only does two things.

The Secret to Understanding

Planned Giving

Part 1: The tools

The Secret to Understanding

Planned Giving

Part 2: Motivations for fundraisers

Gift planning can do two things

• Lower taxes

• Trade gift for income

Fundraisers should use it for two reasons

• If you are asking for cash, you are asking small

• A donor says the magical phrase, “I wish I could do more, but …”

If you are asking for cash, you are asking

small

Wealth is not held in cash. It is held in assets.

If you are asking from the cash bucket, you are asking from the small bucket.

99%

1% Financial assets held by families (U.S. Census 2007)

Other financial assets (stocks, bonds, retirement accounts, life insurance, mutual funds)

Cash: Checking, savings, money market deposit accounts, and similar

The magical phrase:

“I wish I could do more, but …”

The magical phrase, “I wish I could do more, but …”• I have to save for retirement• I am on a fixed income• I don’t have the cash right

now• Everything is tied up in the

business/farm• Maybe I’ll leave a gift in my

will• I only have so much money

and I might live a really long time

• Etc., etc., etc.…

The magical phrase:

“I wish I could do more, but …”

The magical response:

“What if there was a way you could do both?

Would you like to hear about that?”

A simple way to ask from the big bucket…

Donor Charity$100k Cash

Donor Charity

Income tax deduction ($100,000 x 39.6%)

$39,600+

Avoid capital gains tax($90,000 x 23.8%)

$21,240

Income tax deduction ($100,000 x 39.6%)

$39,600

$100k Stock

Donor Charity$100k low basis stock

$100kcash

immediately buy identical stock(100% basis)

The charitable swap

No “wash sale” rule because this is gain property, not loss

property

Donor Charity$100k low basis stock

$100kcash

immediately buy identical stock(100% basis)

A FREE tax benefit you lose every time you give cash

Donor

Charities

$100kcash

The charitable swap for charities that want only cash

Donor Advised

Fund

$

$

$

$100k low basis stock

immediately buy identical stock(100% basis)

The Secret to Understanding

Planned Giving

Part 2: Motivations for fundraisers

The Secret to Understanding

Planned Giving

Part 3: Motivations for financial advisors

Gift planning can do two things

• Lower taxes

• Trade gift for income

Financial advisors should use it for two reasons• To provide dramatic benefit to

highly desirable clients

• To increase (multi-generational) assets under management

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

$2.0 million <$3.5 million

$3.5 million <$5.0 million

$5.0 million <$10.0 million

$10.0 million <$20.0 million

$20.0 million ormore

Estates including charitable planning by estate size

(IRS Statistics of Income 2008)

Selling and reinvesting a highly appreciated non-income producing asset

Simple Sale

$1,000,000 asset$1,000,000 gain (if zero basis)

$288,000 tax (23.8% fed + 5% state)

$722,000 left to invest

Charitable Remainder Trust

$1,000,000 asset$1,000,000 gain (if zero basis)

$0 tax (CRT pays no tax)

$1,000,000 left to invest& $100,000+ tax deduction

Tax-free growth environments• Growth inside a donor

advised fund is tax free

• Growth inside a charitable remainder trust is tax free (only distributions are taxed)

• Growth inside a private foundation is tax limited (either 2% or 1% rate)

Multi-generational management

Inheritance• Small pools after

division by 1/n children and estate tax

Private Foundation/DAF

• Individual relationships with each heir

• High maintenance / personal losses

• Big pool with no division and no estate tax

• Preexisting position as pool manager

• Low maintenance/ charitable organization losses

Gift planning can do two things.

Fundraisers should use it for two reasons.

Financial advisors should use it for tworeasons.

The secret to understanding

planned giving