Planned Giving Basics

If you don’t work with planned financial gifts every day, here are the basics that will help you serve your clients better.

September 20, 2007
by Community Foundations

Often, one of your greatest opportunities to assist clients in maximizing the personal benefits of giving occurs when they are making other major business, personal and financial decisions, such as:

  • planning an estate;
  • writing or revising a will;
  • selling a business or other major asset;
  • planning for retirement;
  • handling a financial windfall, such as from a merger or acquisition.

In many of these situations, an opportunity exists to help your clients through planned giving.

Planned Giving 101

Planned giving refers to several gift techniques that typically involve your client retaining a portion of, or an interest in, the asset the client is giving to charity. Some people consider charitable distributions under a will or trust, life insurance and retirement plan beneficiary designations and other direct — but deferred — gift arrangements, as also being planned gifts.

One of the simplest and most important things you can do to help your clients enjoy the benefits of planned giving is to ask them the giving question: Are there charitable or community needs you would like to support? Helping your client make planned gifts is a way to ensure that their charitable intentions are carried out and will outlive them. You need not be an expert to make these opportunities available. Your local community foundation can help you sort through the numerous options available to your clients.

Planned gifts can provide your clients with many benefits. These benefits can include an immediate charitable income tax deduction (even though the charity may not receive any property until some future date), avoidance or deferral of capital gains taxes on appreciated property used to fund the gift, retained and possibly increased income to your client or others they care about, possible assistance in asset diversification and, last but not least, support for charitable causes.

Planned Giving Through Retirement Plans

Attracted to tax-deductible contributions, many individuals have amassed significant wealth in their pension plans and individual retirement accounts. Income tax-deferred retirement accounts allow personal assets to grow on a tax-deferred basis; however your clients are taxed on the withdrawals at their income tax bracket at the time when withdrawals begin.

If, after death, the retirement account benefits are paid to anyone other than your client's spouse, those benefits may be subject to estate taxation as well (if your client's estate is above a certain value). This combined income tax and estate tax may be as high as 50 percent to 75 percent. If, however, your client leaves tax-deferred retirement accounts to a charitable organization at the time of death, they can transfer these assets without incurring any taxation.

One simple way to implement your client’s philanthropic wishes is for your client to name the local community foundation as a beneficiary of their retirement plan. Retirement assets can be gifted easily to a community foundation at death. This can be done by designating the community foundation as the beneficiary for the retirement asset. Tax savings can be significant.

For example, if your client were to give his or her children a $100,000 IRA upon death and another $100,000 of assets to the community foundation, the children would have to pay income taxes on the IRA (in addition to any estate taxes that might be owed). By giving the IRA to the community foundation and the other assets to the children, all of your client’s income taxes are avoided on the IRA. This income tax benefit can be important when planning the distribution of your clients’ pension, profit-sharing, Section 401(k) and Section 403(b) plans and IRAs.

Clients can use assets held in an individual retirement account (IRA), 401(k), 403(b) or similar account to start a fund at the community foundation at the time of their death. Many donors choose to donate all or part of their retirement plan to the community foundation to set up a donor advised fund, naming their children as the advisors. This arrangement allows children to participate in distributing a larger pool of charitable funds than would have been available if the money had been left to them outright.

Important Details About Giving Through Retirement Plans

  • Changing the beneficiary of a retirement fund can be as easy as filling out a form — especially for IRAs. Your client will not have to rewrite their will or add a codicil to exercise this option.
  • If an account owner wishes to pass the account on without having it be taxed at all, they can designate the community foundation as the primary beneficiary. This means that the account will pass directly to the community foundation at the owner's death, not to a spouse or child.
  • If both spouses wish to use their retirement accounts to benefit the community foundation after both spouses die, they can both name the community foundation as the contingent beneficiary of their retirement accounts. This means that when the first spouse dies, that spouse's retirement account will pass to the living spouse. The living spouse will incur income tax but not estate tax. When the second spouse dies, the accounts will pass to the community foundation without any taxation.
  • Alternatively, your client may also designate the community foundation for a percentage of the assets that remain in the plan at his/her death.

Getting Help With Planned Giving

There are a number of different planned gift options, each of which is useful in certain circumstances. The goal is to find the planned gift that is most advantageous to your clients, to their families and to the causes they support. The staff of community foundations — with years of legal and financial planning experience — can provide assistance to help you create planned gifts that are right for your clients.

Contact your local community foundation by logging on to www.communityfoundations.net.

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This article was contributed by Maryland Community Foundations to help advisors work with their clients on charitable giving.