The Portfolio Approach to Planned Giving

When formulating your estate, gift and income tax plan, first and foremost define your goals. If one goal is furthering your philanthropy, any of three broad planning categories, each with its own set of techniques and vehicles, are available to achieve a combination of your charitable, tax, and other financial goals.

The three broad categories of charitable planning techniques are those that:

  • benefit charity, only, while providing estate, gift, and income tax benefits;
  • allow you to diversify appreciated assets in an income-tax effective manner, while benefiting charitable and non-charitable beneficiaries; and
  • benefit charity, while shifting wealth to the next generation with little to no estate and gift tax.

This post discusses these categories conceptually. Whether one or more of the planned giving techniques described makes sense for you depends upon your goals, both charitable and non-charitable, as well as the assets available to you. Often times, depending upon your defined goals and assets available to you, you may end up implementing more than one of the discussed strategies.

Three points before we get started:

  • “Planned giving” and estate planning are lifetime endeavors, focusing upon gifts both during lifetime and at death – not merely the plan you set in place to take effect upon death. Planned giving, in particular, is a term used in the charitable world and should be thought of as moving beyond simple checkbook giving to more strategic, and often tax-advantaged means of supporting charities. Effective planning often requires implementing techniques during lifetime.
  • This post offers broad descriptions of these planned giving tools. Most are quite complex, legally. This post is not an exhaustive treatise. Where we’ve provided additional educational material in other blog posts concerning one of these topics, you will find a link to the material.
  • Always consult your own tax attorney, accountant, and/or financial advisor before implementing any of these strategies. Nothing in this post should be construed as legal or financial advice, and the information is provided for educational purposes only. Every individual’s situation is unique, and only by consulting with professionals fully versed in your facts and circumstances can it be determined if one or more of the techniques discussed will work for you.

Outright Gifts

The simplest means of leaving a charitable legacy is through an outright bequest gift to charity. You can do this through simple instructions as part of testamentary documents such as a will. The language for leaving such gifts can be as simple as:

I bequeath XX% of my estate to CHARITY Y, EIN # ##-#######, an organization based in Any State, with an address of 123 Main Street, Anytown, Any State  11111.

Bequests take place at the time of you death. For estate and gift tax purposes, the entire value of any bequest to a qualified charity is deductible at its full value. While technically a bequest is a gift made in a Last Will and Testament, you can think of any charitable gift taking place at death as a bequest. While the above example is a bequest made as a percentage of your estate, it is possible to leave specific property or a set sum of money. There are pros and cons to each of these bequest formulations.

To the point that planned giving goes beyond simply giving at death, however, there are other ways of making direct gifts that can benefit you and may allow you to give more than you otherwise might. If you are 70 ½ or older with an IRA, one direct-gift technique is the IRA Qualified Charitable Distribution (QCD). This tax code provision allows a distribution directly from a taxpayer’s IRA to a qualified charity. The distribution can be in an amount of up to $100,000 each year, and you can make more than one QCD each year, provided the aggregate amount of QCDs do not exceed $100,000 in any one tax year. These IRA distributions are excluded from your income for tax purposes, but they do count towards your IRA annual required minimum distribution. We go into more detail on this here.

Establishing and funding a private foundation or a donor-advised fund (DAF) account are two other techniques allowing you to make tax-advantaged gifts now, build a charitable fund, and use that fund to support operating charities at a future date. These techniques provide a method allowing you to think strategically about your future charitable giving. This post illustrates the case of one of our clients who used his DAF to build up charitable assets during his working years, allowing him to be more charitable in retirement than he otherwise might have been.

Create an Income Stream for a Non-Charitable Beneficiary

Two common vehicles used to generate an income stream for you or a loved one during lifetime, generate a charitable income tax deduction immediately, and set aside assets for designated charities are the charitable gift annuity (CGA) and the various types of charitable remainder trusts (CRTs). Both of these vehicles provide a charitable deduction for income tax purposes in the year funded. Depending upon the asset used to fund the vehicle, they may allow you to diversify a highly appreciated asset while deferring the income tax that would otherwise be owed had you sold the asset outright.

The charitable gift annuity is analogous to an annuity you might purchase from with an insurance company. However, rather than contracting with an insurance company for an annuity payment, you contract with a charity for the annuity payments.

To implement a CGA, you exchange cash or assets with a tax-exempt organization that, in return, promises to pay you an annuity for a term of years or over lifetime.

Note: Most charities do not offer CGAs as they are highly regulated at the state level and often times are only marginally beneficial to the organization.

The value of a CGA provided by a charity is worth less than an annuity you could have purchased commercially for the same price. Accordingly, you are entitled to a charitable income tax deduction that equals the difference between the fair market value of the property you exchange with a charity for a CGA and the actuarially calculated value of the annuity you received for the property. (The IRS provides the method for determining the value of your charitable tax deduction).

This transaction is considered to be a “part gift, part sale” transaction. Accordingly, each year you receive an annuity payment a portion of the payment is included in your taxable income. The charity issues you a 1099 annually documenting the taxable portion of the payments received. When the annuity term ends (after a term of years or at the death of the annuitant), the charity keeps the balance of funds used to fund the annuity, if there is a fund balance, and it is possible that the charity will pay you more than you gave them for the annuity. Find more details about CGAs here.

Charitable remainder trusts (CRTs) also provide an income stream to a non-charitable beneficiary or beneficiaries, establish a pool of funds for future distribution to named charities, and generate a tax deduction in the year funded. Like a CGA, the income stream can last for a term of years or over the beneficiary(ies) lifetime(s).

When the income stream ends, any assets remaining in the CRT are distributed to charities named in the CRT document. Similar to a CGA, the non-charitable beneficiaries must include distributions from the CRT in their taxable income each year (the CRT issues the beneficiaries a K-1 each year detailing how to include the payments in taxable income).

Unlike a CGA, however, a CRT is itself a tax-exempt entity that a donor establishes and funds with cash or, preferably, a highly appreciated long-term capital gain asset. Since the CRT is tax exempt, it can sell an appreciated asset without incurring a tax liability at the time of the sale. As a consequence, the entire value of the asset sold is available for reinvestment by the CRT.

Charitable remainder trusts come in many variations. They are a perfect fit for those donors who seek to:

  • diversify highly appreciated assets,
  • defer the income tax that would otherwise occur immediately if they sold the asset outright,
  • benefit charity at a future date, and
  • create an income stream for themselves and/or a loved one.

Generally speaking, because of costs associated with establishing and administering a CRT, it probably doesn’t make sense to create a CRT if it is to be funded with property valued at less than $500,000. You can find additional detail on CRT’s here.

Defer Wealth to the Next Generation

One of the most powerful, as well as most complicated charitable estate planning vehicles available is the charitable lead trust (CLT). A CLT works for donors seeking to both benefit charity while shifting wealth to the next generation in an estate and gift tax effective manner. Like CRTs, CLTs come in a variety of types.

At its basics, a CLT is in many respects the inverse of a CRT. With a CLT, an income stream is paid to a charity for a term of years (up to 20). When the income term ends, anything left in the trust is distributed to the non-charitable trust remainder beneficiary(ies) For estate and gift tax purposes, a gift to the non-charitable beneficiary(ies) occurs at the time the CLT is funded.

In some cases, it is possible that the calculated value of that gift will be zero (or at most of a deminimus amount). That said, it is quite possible that the non-charitable beneficiaries will receive a significant distribution from the CLT when it terminates. This occurs if the trust earns an amount significantly in excess of the payments to charity prior to the CLT termination.

No estate or gift tax liability is generated at the time the CLT terminates. The value of the gift for estate and gift tax purposes is actuarially determined at the time the CLT is funded. Any estate and gift tax liability is imposed at that time. What actually happens when the CLT terminates is irrelevant.

The benefit here is that it removes the assets placed in the CLT from your estate for estate tax purposes while allowing you to pass wealth to loved ones if the trust can earn a return on assets invested in excess of the payments to charity during the trust term. A fuller description of CLTs can be found here.

A Hub for Your Giving Portfolio

You likely wouldn’t be reading this if you were not already charitably minded. However, you likely are also motivated to create income either for yourself or for loved ones and to minimize what portion of your estate ends up in government coffers. Balancing these demands is the true definition of planned giving.

Donors have a powerful set of tools at their disposal as they consider their planned giving options. Many donors in fact will utilize more than one of the techniques described above, building a portfolio of charitable giving tools.

A DAF account offers a powerful vehicle to serve as a charitable hub for your planning. Beyond the simplified giving that comes with a DAF, here are a few other ways a DAF account can serve as a hub for your giving:

  • Managing a multi-year gift where you want to protect your donor intent
  • Serving as the charitable beneficiary of your CRT, allowing you to flexibly support a variety of charities through one CRT
  • Serving as the charitable beneficiary of your CLT
  • Acting as the recipient of your IRA or other financial assets at death, which lets you specify a single charitable beneficiary but offering you the flexibility to define your legacy over time with the DAF provider or a successor advisor you appoint carrying out your wishes
  • Giving you a separate vehicle to support causes you care for but are outside the mission of your private foundation.

We’ve elaborated on this charitable hub idea in a post here.

We hope these strategies offer you some thoughts on how you can maximize your charitable impact while also achieving other goals you may have.


  • Jeff Zysik

    Jeff Zysik is COO and CFO at DonorsTrust. He is an attorney and accountant with fifteen years of tax planning experience, focusing primarily on sophisticated estate and income tax concepts. Before joining DonorsTrust, he was managing-director and co-founder of Charitable Entity Administration, LLC (CEA).

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