A Planned giving can be executed through one or more of the following vehicles/instruments –
Outright Gifts The least complicated of all the vehicles of planned giving where the donor simply makes an outright payment though check, credit card, or any other means. The granter of the outright gift can avail income tax deductions but does not have any retained interest in the donation.
Gifts of Insurance Another common planned giving vehicle where the donor makes the recipient organization the beneficiary or the owner of his/her life insurance policy. The donor continues to receives income tax deductions on the premiums paid by him for maintenance of the policy while the recipient nonprofit organization stands to receive the insured amount at the time of the donor’s death.
Pooled Income Funds A planned giving instrument in which several donors pool up funds to form a trust and assign its management to to a nonprofit organization. The nonprofit organization then owns the assets, but the interest earned on this pooled funds is paid out to the donors for the remainder of their lives.
The advantage of pooled income fund from a donor’s perspective are –
a) Lifetime income from the fund.
b) Capital gains taxes are not to be paid by the donors.
c) The donor can claim partial income tax deduction.
Caveat: The trust formed for managing the pooled assets in this method is irrevocable. This means that while the donors are at the liberty to change the administering nonprofit organization they cannot dissolve the trust or transfer the trust to a for-profit entity or to any other individual.
Charitable Remainder Trusts are very similar to pooled income funds, except that the income is transferred to surviving spouse even after the death of the principal donor. There are two types of charitable remainder trusts:
a) Unitrusts – In an ‘unitrust’ arrangement the annual payment made by the nonprofit organization to the donors depending on the performance of the investment within the trust. Thus the payment may vary from year to year.
b) Annuity Trusts. A charitable remainder annuity trust on the other hand pays a fixed percentage of the original donation value to its donor each year irrespective of the performance of the investment in the market.
Wealth Replacement Trusts are another kind of planned giving vehicle which are used to protect the donor’s heirs rights by replacing the assets they would have received had the gift been not made to the nonprofit organization.
This is generally achieved by first creating a a charitable remainder trust or a pooled income funds along with establishing a life insurance trust with her heirs set as its beneficiary. This trust would be funded with a life insurance policy.
Normally the premiums for the policy are paid from the increased investment income provided by the pooled income fund or the charitable remainder trust.
In the event of the death of the donor and the spouse, the heirs get the death benefit from the insurance policy while the nonprofit organization receives the donated asset.