What Is Planned Giving?
Planned giving, also known as legacy giving, refers to the process by which individuals arrange significant charitable contributions that are typically allocated at a future date, often as part of their broader financial planning. These contributions enable philanthropic individuals to make larger gifts to charitable organizations than they might be able to make from ordinary income alone59. Planned giving strategies often involve sophisticated estate planning and tax considerations to maximize the impact of the gift while minimizing its effect on the donor's estate58. Such gifts are usually made through legal instruments like a will or trust57.
History and Origin
The roots of modern philanthropy, which encompass planned giving, can be traced back to ancient civilizations where acts of benevolence and care for others were integral to societal structures55, 56. Over centuries, these practices evolved, moving from religiously motivated giving to more formalized state-supported provisions for the poor54. In the United States, the concept of incentivizing charitable donations through tax benefits began with the establishment of the charitable deduction in 1917, following the passage of the War Revenue Act. This legislation aimed to prevent high taxes from discouraging wealthy individuals from donating surplus funds to charitable causes53.
A significant development in planned giving came in 1942 when Allen Hawley at Pomona College pioneered the "Pomona Plan," where donors received a lifetime annuity in exchange for a donation to the college upon their death. This model subsequently influenced many other institutions. Today, organizations like the National Philanthropic Trust, founded in 1996, provide expertise in facilitating various planned giving vehicles, including donor-advised funds, and have played a role in documenting the evolution of philanthropy through initiatives like "A History of Modern Philanthropy"51, 52.
Key Takeaways
- Planned giving involves pre-arranged, often substantial, charitable contributions, frequently executed through estate plans.
- It allows donors to support causes they believe in while potentially realizing significant tax deductions and estate tax benefits.
- Common forms of planned gifts include bequests, charitable remainder trusts, and charitable gift annuities.
- Assets used for planned gifts can include cash, securities, real estate, and life insurance policies.
- The effectiveness of planned giving often depends on careful coordination with financial and legal advisors.
Formula and Calculation
While there isn't a single universal formula for planned giving itself, the calculation of the charitable deduction for certain planned gifts, such as a charitable gift annuity or a charitable remainder trust, involves actuarial calculations of the present value of the future gift.
For a charitable gift annuity, the deduction for the donor is generally the fair market value of the assets contributed, minus the present value of the income interest retained by the donor50. The present value of the income stream is determined using IRS actuarial tables, which consider factors like the donor's age, the payout rate, and the frequency of payments.
For instance, the deductible portion of a charitable gift annuity might be calculated as:
Where:
Contribution Amountis the value of the appreciated assets or cash given.Present Value of Annuityis the current calculated value of the future income payments the donor will receive, based on IRS tables and the annuity's terms.
Donors contributing appreciated property, like securities or real estate, may receive a charitable deduction for the full market value of the asset and avoid paying capital gains tax on the transfer48, 49.
Interpreting Planned Giving
Interpreting planned giving primarily involves understanding its dual benefit: supporting a charitable cause and achieving specific financial and tax objectives for the donor. For the donor, planned giving is a strategic decision that reflects long-term philanthropic intent, often aligning with their legacy goals47. It allows individuals to make a significant impact on an organization's mission, potentially beyond what they could donate during their lifetime45, 46.
For the receiving charitable organization, planned gifts, though often realized in the future, represent a vital source of long-term funding and stability. These gifts can be substantial and, while not immediately available as cash, enable nonprofits to plan for future programs and initiatives44. The proper interpretation for both parties involves careful consideration of the legal and financial implications, ensuring that the donor's wishes are fulfilled and the organization's future needs are met. This often requires professional guidance to navigate complex tax regulations and legal structures.
Hypothetical Example
Consider Jane, a 75-year-old widow who wishes to support her alma mater, University A, while also ensuring a steady income stream for herself. She owns a diversified portfolio of investments, including a stock that she bought for $50,000, which is now worth $200,000.
Jane decides to establish a charitable gift annuity with University A. She contributes the $200,000 stock to the university. In return, the university agrees to pay her a fixed annual income for the rest of her life.
- Contribution: $200,000 (stock)
- Jane's Basis in Stock: $50,000
By donating the appreciated stock directly, Jane avoids paying capital gains tax on the $150,000 appreciation43. She also receives an immediate tax deduction in the year of the gift, calculated based on the present value of the future annuity payments she will receive, which is determined using IRS actuarial tables. Let's assume, based on her age and the annuity rate, the calculated present value of her income stream is $120,000.
Her immediate charitable deduction would be:
This $80,000 can be deducted from her Adjusted Gross Income (AGI) for tax purposes, subject to IRS limitations42. She then receives her fixed annuity payments annually, part of which may be tax-free for a period. Upon her passing, the remaining principal of the annuity goes entirely to University A, fulfilling her philanthropic goal and leaving a lasting legacy.
Practical Applications
Planned giving manifests in various practical applications within philanthropy, enabling donors to make significant contributions while achieving personal financial goals. One common application is the establishment of a bequest through a will or living trust, directing assets like cash, securities, or retirement accounts to a chosen charity upon the donor's death40, 41. This allows donors to retain control of their assets during their lifetime.
Another application involves charitable trusts, such as charitable remainder trusts (CRTs) or charitable lead trusts (CLTs). CRTs provide income to the donor or other beneficiaries for a set period, after which the remaining assets go to charity. CLTs, conversely, provide income to a charity for a period, with the remainder eventually passing to non-charitable beneficiaries. These structures offer flexibility in managing wealth and can reduce estate and gift taxes.
Donor-advised funds (DAFs) represent a growing area of planned giving. Donors contribute assets to a DAF sponsoring organization, receive an immediate tax deduction, and can then recommend grants to charities over time38, 39. The National Philanthropic Trust reports that contributions to DAFs reached a new high of $86 billion in 2022, with $52 billion granted out to charities37. This mechanism allows for flexibility in timing donations and grant recommendations, providing both immediate tax benefits and long-term philanthropic engagement. The Internal Revenue Service (IRS) provides detailed guidance on the deductibility of charitable contributions, including various forms of planned gifts, emphasizing the importance of proper documentation for claimed deductions.34, 35, 36.
Limitations and Criticisms
While planned giving offers substantial benefits, it also has limitations and has faced criticism. A primary concern for donors is the irrevocable nature of many planned gifts; once assets are transferred into certain charitable vehicles, they cannot be reclaimed33. This requires careful consideration of long-term financial stability before committing.
From the perspective of charitable organizations, a criticism, particularly regarding donor-advised funds (DAFs), is the potential for assets to remain undistributed for extended periods. While donors receive an immediate tax deduction when contributing to a DAF, there is no federal mandate for how quickly the funds must be disbursed to active charities31, 32. This can lead to what some critics refer to as "warehousing" of charitable assets, potentially reducing the immediate flow of funds to nonprofits that rely on current donations30. For example, the Tax Policy Center highlighted that the 2017 Tax Cuts and Jobs Act (TCJA) significantly increased the standard deduction, reducing the number of taxpayers who itemize and thus decreasing the tax incentive for many to make charitable contributions27, 28, 29. A study by researchers at Indiana University and the University of Notre Dame estimated that U.S. charitable giving fell by about $20 billion in 2018, the first year of the TCJA's implementation, primarily due to this change in the standard deduction26.
Furthermore, the complexity of some planned giving vehicles, such as trusts, necessitates professional legal and financial advice, which can incur additional costs for the donor. Donors must also be aware of the Adjusted Gross Income (AGI) limitations on itemized deductions for charitable contributions, which can vary based on the type of gift and the nature of the receiving organization25.
Planned Giving vs. Major Gifts
Planned giving and major gifts both involve significant financial contributions to charitable organizations, but they differ primarily in their timing, structure, and donor engagement.
| Feature | Planned Giving | Major Gifts |
|---|---|---|
| Timing | Arranged in the present, often allocated in the future (e.g., at donor's death)23, 24 | Typically immediate or short-term contributions22 |
| Focus | Long-term legacy, estate planning, and deferred impact20, 21 | Addressing immediate organizational needs or specific projects19 |
| Complexity | Often involves complex legal and financial instruments (e.g., wills, trusts, annuities)17, 18 | Generally simpler, direct cash or asset donations16 |
| Tax Impact | Can provide current tax deductions and future estate tax benefits14, 15 | Primarily provides current income tax deductions if donor itemizes |
| Donor Control | Donor might retain control or receive income for a period before the gift is realized13 | Donor relinquishes control upon donation |
| Assets | Often involves non-cash assets like appreciated securities, real estate, retirement accounts | Commonly cash, but can also include securities or property12 |
The confusion between the two often arises because planned gifts, due to their size and long-term nature, are inherently "major" contributions. However, the distinction lies in the planning horizon and the financial mechanisms employed. A major gift is a large, often unrestricted, donation given in the present to meet an immediate need, while planned giving is a strategy that integrates philanthropy into a donor's overall financial and estate plan, with the gift's realization typically deferred10, 11.
FAQs
What types of assets can be used for planned giving?
A wide range of assets can be used for planned giving, including cash, publicly traded securities (like stocks and bonds), real estate, tangible personal property, life insurance policies, and retirement plan assets such as IRAs or 401(k)s9. The choice of asset often depends on the donor's financial situation and their desire to maximize tax benefits.
What are the tax benefits of planned giving?
Planned giving can offer several tax benefits. Donors may receive an immediate tax deduction for the fair market value of their contribution, especially if they donate appreciated assets and avoid capital gains tax on the appreciation7, 8. Additionally, some planned gifts can reduce estate taxes by removing assets from the donor's taxable estate6. The specific benefits depend on the type of gift and the donor's individual tax situation.
Is planned giving only for the wealthy?
No, planned giving is not exclusively for the ultra-wealthy. While often associated with significant contributions, planned giving encompasses various strategies, including simple bequests in a will, which can be made by individuals of all income levels4, 5. The core idea is to integrate charitable intent into one's financial and estate plan, allowing anyone to leave a lasting legacy.
How does the IRS regulate planned giving?
The IRS sets rules for charitable contributions, including planned gifts, primarily through the Internal Revenue Code. These regulations cover aspects such as eligible organizations, substantiation requirements for deductions (e.g., written acknowledgments for gifts over $250), and limitations on the deductible amount based on a percentage of the donor's Adjusted Gross Income (AGI)2, 3. Donors typically need to itemize deductions on Schedule A of Form 1040 to claim charitable contribution deductions, although temporary provisions have occasionally allowed a universal deduction for non-itemizers1.