How planned giving works ?

‘Planned giving’ (also called ‘gift planning’ or ‘deferred giving’) has caught the fancy of nonprofit fund raisers in recent years as a win win instrument for both the donors and the donee.

However ‘Planned giving’ is a  vast and a complex subject and can be really intimidating for a new fund raisers.

What follows is a series of tutorials aimed at providing nonprofit leaders the basic idea of ways they can apply planned giving vehicles to receive donation for their 501(c)(3) nonprofit organizations.

Definition:  Planned Giving is a fund raising method that involves use of a combination of  financial instruments to enable a donor to bequeath money or other assets to a nonprofit upon his death; or a way to invest assets in a manner that lets the donor receives its benefits during his life time and then to donate the principal or the remaining amount to the nonprofit at his death.

Planned giving is essentially a tool used for long-term fund raising programs, and cannot be used for raising funds in a short span of time.

How planned giving works

Mr.D  who is planning to to retire from his services wants to ensure a stable income stream to maintain himself before he stops receiving salary.

He plans to raise this stable stream of income by selling his non income generating property (say real estate/stock etc) and investing the proceeds to generate a monthly income.

If Mr.D sells the property for say USD 1,000,000 and pays a capital gain tax of 10% on the sales proceed – he gets a net income of  USD 900,000 which could if invested at say 8% would generate an annual income of $72000 for Mr. D.

Alternatively, if Mr. D  donates this property to a tax-exempt nonprofit , the organization in turn could sell the property at USD 1,000,000 without having to pay any capital gain tax. The nonprofit would in turn agree to pay Mr.D 8% on the total money which would be $80,000 each year for the rest of his life.

Thus, Mr. D can receive $18,000 more each year by this planned giving while the nonprofit organization would get the benefit of enjoying the property after Mr.D’s  death.

Moreover, Ms. D would also get additional benefit in the form of deduction on charitable contribution in the year he made the gift to the organization.

Thus in essence, the nonprofit organization benefited Mr.D in two ways –

1) By saving him the Capital gains taxes he would have otherwise paid.

2) By giving him the benefit of deduction on charitable contribution in the first year he gave the asset to the organization thus saving him the income tax on the income he received from the nonprofit which would have otherwise to be paid had he generated this income from investment of outright sales proceed.

The next part of this tutorial discusses the most common planned giving vehicles used by nonprofit organizations in the U.S.A.