The Office of Advancement Services is frequently asked to record various types of planned gifts. Oftentimes, this office also is asked to provide a description of the nature of such a gift, or explain how various types of planned gifts should be recorded by us and/or handled for tax purposes. Ultimately, the Advancement Services Office should refer related inquires to the Gift Planning staff. This does not, however, remove the need for the Advancement Services staff to be familiar with this type of gift. For this reason, below are general explanations of certain types of planned gifts with commonly accepted rules. Information concerning specific treatment of these gifts at CWRU should be procured from the Gift Planning staff.
The most common and simplest form of planned giving, a bequest is a gift of property or cash that is made through a donor’s will. Benefits to Donors: Donors do not have to part with any money until they die, and do not owe any estate tax on the amount of the bequest.
II. Charitable Remainder Trusts
Two basic types of charitable remainder trusts qualify for federal tax benefits. In both arrangements, a donor gives stock, cash, or other assets to a trust. Those assets are invested; producing income for the donor--or other beneficiary--either for a fixed period of time or until the donor dies. The donor is allowed to claim a tax deduction for the estimated portion of the assets that will ultimately go to charity. When the donor dies, the charity keeps all remaining assets. Charitable remainder trusts are commonly used by people who want to give real estate. Real estate is not usually given through gift annuities and cannot be given to pooled-income funds.
Benefits to Donors: Donors can get income-tax deductions and escape capital-gains taxes by making such gifts. Many donors find the trusts an appealing way to prepare for retirement. The assets can be invested to earn a lower rate of return when the donor is younger and then shifted to earn a higher rate of return, and thus provide more income, during a donor’s later years.
Under a basic unitrust, the donor receives one or more yearly payments equaling a fixed percentage of the value of the asset. The value is assessed each year. Under a net-income unitrust, the donor receives only the income earned by the trust, even if the trust earns less that the payout rate. However, the trust can be set up to include a “make-up provision”, which allows the donors to make up the lost income, provided the trust earns more than the payout rate in future years.
b) Annuity Trust
The donor receives a yearly fixed payment equaling at least 5 per cent of the value of the asset at the time the deferred-giving agreement was signed.
III. Gift Annuities
Donors contribute cash, securities, or other assets to a charity. In exchange, they receive annual payments for a fixed amount of time. With a deferred gift annuity, the annual payments do not start when the gift is made; they begin at a time specified by the donor when the gift is made.
Benefits to Donors: Gift annuities are attractive to donors who want to receive income from assets that have risen sharply in value, such as cash or stocks. In return for gifts of such assets, the charity guarantees the donors a fixed annual income for the rest of their lives and helps the donor avoid capital-gains tax. The donor also gets an income-tax break on a portion of the earnings from an annuity; the exact amount depends on a donor’s age.
IV. Pooled-Income Funds
The donor gives cash, securities, or other assets to a non-profit organization, which then invests those assets in a large, diversified portfolio. The donor receives income from the fund proportionate to the value of his or her contribution, as well as an income-tax deduction based on the estimated principal that will be left to the charity. Obtaining a "unit" in a pooled-income fund is similar to buying a share of a mutual fund.
Benefits to Donors: Like gift annuities, pooled-income funds appeal to donors who want to earn income on stock and other assets and escape capital-gains taxes. Unlike the annuities, a donor’s income from a pooled-income fund is tied to fluctuating interest rates. That means that in the long run, donors may receive larger earnings than they do from annuities, but they can also do less well in the short term. As a result, the funds tend to appeal to younger people who are more often willing to take risks with their investments.
V. Charitable Lead Trusts
A charity receives the income from the donor’s assets for a specified time, after which the asset is transferred back to the donor or to the donor’s heirs.
Benefits to Donors: A lead trust can reduce gift and estate taxes or provide a charitable deduction for the donor. Charitable lead trusts are most appealing to wealthy donors who want to pass appreciated assets to their heirs without paying a substantial amount in taxes. The donor pays a gift tax on the asset when it is placed into the trust; after that it can grow tax-free. At the end of a specified period, the asset is returned to the donor’s heir or heirs, who do not have to pay any additional taxes.
-Advancement Services Orientation Manual