The idea of asking donors to make a "blended gift" is an emerging trend in the world of philanthropy. A blended gift is the combination of a current gift, or a commitment to make a series of current gifts, together with a planned gift, such as a bequest, charitable trust or charitable gift annuity. The current gift portion of the blended gift will provide the donor and charity with benefits today while the planned gift portion typically provides both current and future benefits. With a blended gift, a donor can make his or her giving go further.
Over the past decade, the focus of charitable capital campaigns has shifted so that many campaigns now include goals with respect to planned gifts. Campaigns now target 20% to 40% of the overall goal towards the receipt of planned gifts. Individuals who have made regular gifts in the past, who strongly support a charity or who have the capacity to make a large gift, may be asked to consider making a blended gift.
As the likelihood of a blended gift request grows, professional advisors—attorneys, CPAs, financial advisors, insurance agents—who work with potential donors will increasingly be asked to help their clients assess the feasibility, benefits and best structure for their clients to make these gifts. This article series will focus on twelve of the most common blended gifts arrangements and the potential donor benefits for each.
Part I of this series focuses on three types of blended gifts – an outright gift and bequest, an endowed gift and bequest and an IRA charitable rollover and bequest. This article will discuss some of the unique aspects of these gifts, the motivating factors and the benefits for the donor as well as provide examples to illustrate these concepts. While there may be many issues holding a donor back from making a large outright gift, a blended gift may be the answer the donor is looking for, allowing an immediate impact while also providing long-term support.
GIFT AND BEQUEST
The first blended gift is an outright gift and bequest. Due to any number of circumstances in the donor's life, he or she may be unwilling or unable to make a large major gift toward a capital campaign. That same donor may, however, be able to give a modest amount outright in conjunction with a much larger planned gift, such as a bequest.
Due to its simplicity, a bequest remains the most popular type of planned gift. A blended gift that includes a bequest may be attractive to a broad range of donors, even those with modest wealth or limited income. A bequest, whether as part of a blended gift or on its own, is one of the simplest ways for a donor to make a gift to support their favorite charity or charitable cause.
A charitable bequest simply requires a donor to include their preferred charitable organization in their will or living trust. As easy as it is to establish a bequest, the bequest can also be revoked by the donor for any reason, including if their own needs or the needs of a family member changes. Although the likelihood of revocation may be low, depending on the donor's circumstances, the possibility is always there. A donor could decide to change which charity they will leave the bequest to or may decide to leave out a testamentary transfer to charity altogether. For this reason, there is some variation in practice among charities as to whether and how to count bequests toward their capital campaigns.
Some charitable organizations may request that the donor make an "irrevocable bequest" in order to count the gift toward the capital campaign. While the bequest itself is technically never irrevocable—as the donor may still modify or revoke the will or trust at any time—this can be effectively accomplished through a binding pledge agreement. In this circumstance, the donor will sign an agreement that legally obligates the donor to provide the agreed upon amount for the charitable organization in the donor's estate plan. Should the donor not provide for the charity in his or her estate plan, the organization may then seek to enforce the pledge agreement against the donor's estate.
In a similar manner, the donor may designate a charitable organization as a beneficiary of an IRA or other retirement plan. Depending on the donor's circumstances, he or she may choose to designate the charity as beneficiary of all or a percentage of a retirement plan. Typically, a married IRA owner will designate a spouse as the IRA beneficiary. At the owner's death, the beneficiary spouse will then roll the IRA over to his or her own IRA and then name the charity beneficiary of the combined IRA.
A donor who provides for charity by bequest or beneficiary designation may be allowed an estate tax deduction for the value of the gift. This will only be necessary, however, in circumstances where the donor has an estate in excess of the lifetime exemption amount. The estate tax deduction will be taken in the year of the donor's death.
When a donor makes an outright gift, he or she is entitled to a charitable income tax deduction equal to the fair market value of the gift. This deduction will be taken in the year of the gift. The donor's total deductions for the year are limited to 50% of adjusted gross income (AGI) for cash gifts, 30% of AGI for gifts of appreciated property and a total of 50% for cash and appreciated property combined. If the donor has reached the deduction limits for the year, the deduction may be carried forward for up to five additional years.
In addition, if the outright gift was made with long-term appreciated property, the donor will bypass taxation on the capital gain. For most gifts of non-cash assets (with several exceptions, including publicly traded stock) valued at more than $5,000, the property must be appraised by a qualified appraiser and the donor must complete IRS Form 8283 in order to substantiate the deduction. Sec. 170(f)(11).
A donor who is unwilling to part with a large sum outright may be more amenable to including their favorite charity in their will or trust. While a charity would certainly prefer an immediate, outright gift of $1 million to count toward its capital campaign, a smaller immediate gift—perhaps coupled with a bequest to form a blended gift–is preferable to no gift at all. Donors who cannot make the large major gift outright may be able to give a small or medium gift now coupled with that future gift. This blended gift helps donors make an impact now, meeting some of the charity's immediate needs, while also providing for the charity long-term.
Anita is a 78-year-old widow with a moderate-sized estate. While she doesn't receive much income, she lives comfortably on her late husband Jim's retirement plan. She and her husband met at college more than fifty years ago. When Jim was alive, they donated to their favorite charity every year. Now that Jim has passed on, Anita wants to continue their legacy of supporting the organization's mission. However, she is concerned that giving too much too quickly may cause her to sacrifice either her future standard of living or her children's inheritance. After much discussion with the major gifts officer at the charity and consultation with her estate planning attorney, she decides to include the charity in her estate plan with a $500,000 bequest of her late husband's retirement account combined with a relatively modest immediate gift of $40,000. With this blended gift, Anita is able to help the charity meet its immediate goals while also providing for the future. For her generosity, she will be entitled to a $40,000 charitable income tax deduction.
ENDOWED GIFT AND BEQUEST
An endowed gift and bequest is another excellent way for a donor to plan for today and provide for tomorrow. For example, a donor with a fondness for his alma mater may desire to start a scholarship fund but may not have the means to contribute several hundred thousand dollars all at once. He may, however, be able to contribute smaller amounts each year over a period of years. By doing this, the donor plants the seed of an endowment. Paired with a generous bequest, the donor can establish an endowed fund that will pay out a percentage of its earnings each year to the charity for the scholarship fund. The donor may even choose the payout percentage for the endowment. However, to ensure that the endowment can continue in perpetuity, this percentage should not exceed the expected annual return on the endowment's investments.
There are several benefits to the donor in this scenario. First, the donor is able to establish a sizeable endowment and also see the effect of the gift during life. Each yearly payment builds the endowment, which may start paying out to the charity immediately. Second, the donor will receive an immediate income tax deduction in the year of the gift for the amount donated to the endowed fund. The donor will also receive additional charitable income tax deductions each year that a donation is made to the endowed fund, subject to the deduction limits. Third, the donor's bequest will be eligible for an estate tax deduction in the amount bequeathed.
Bill is 75 years old and in good health. He has been a faithful supporter of his favorite charity for the past half century. Bill recently heard about an endowed gift and believes that would be a great way to continue to support the charity for years to come, even after he passes away. Bill doesn't want to dip too deeply into his savings all at once, however. Although he is in good health, he realizes that the uncertainties of advancing age could get expensive. Therefore, Bill decides to make a series of annual endowed gifts of $20,000 for the foreseeable future. This way, he is satisfied that he is protecting himself financially against the uncertainty of the future while also building up the charity's endowed fund. He also goes to see his lawyer to discuss executing a codicil to his will, intending to complete the endowment with a bequest of $500,000 from his estate. Bill will receive immediate charitable income tax deductions of $20,000 with each annual gift, potentially saving him $6,600 in taxes each year.
IRA ROLLOVER AND BEQUEST
A donor may also have significant wealth accumulated in a tax-deferred retirement account such as an IRA. A donor who has other sources of income and appreciated assets will be hesitant to make withdrawals from his or her IRA because distributions from the IRA will be taxable at ordinary income rates, while other assets may provide the donor with liquidity at lower capital gains tax rates. Once the donor reaches age 70 1/2, he or she must begin taking a required minimum distribution (RMD). The RMD is based on a percentage of the IRA's value and increases each year. The RMD amount will increase the donor's AGI for the year and is taxed at ordinary income rates.
When the IRA owner passes away, the IRA assets will pass to the plan's designated beneficiaries. With the estate tax lifetime exemption, most estates will pass their assets tax-free to the decedent's heirs. Distributions from the IRA to the owner's heirs, however, will be taxable. Assuming the decedent had other assets in the estate, the heirs may find the IRA to be the least attractive because of the tax consequences.
Generally, donations to charity during life from an IRA or other retirement plan result in a taxable distribution to the donor. The donor may take a charitable income tax deduction based on the value of the gift. However, deduction limits may prevent a donor from being able to deduct the entire gift in the first year. Charitable donations from an IRA at death, on the other hand, will not result in taxation to either the owner or the charitable organization.
The IRA charitable rollover was introduced in 2006 and became permanent with the passage of the PATH Act of 2015. An IRA owner who has reached the age of 70 1/2 may make a direct transfer from their IRA to a public charity without being taxed on the distribution. This Qualified Charitable Distribution (QCD) is allowed up to a total of $100,000 per year and may offset most or all of the donor's RMD. While public charities are permissible QCD recipients, private foundations, supporting organizations and donor advised funds are not. The owner may, however, make a QCD to a field of interest fund or to pay a pledge. With a QCD the donor is not eligible for an income tax deduction, since there was no taxable income received.
The IRA charitable rollover is an excellent gift on its own, but paired with a planned gift, such as a bequest, it allows a donor to benefit the charity well into the future. A simple bequest of estate assets may be preferable here. However, it is also likely the donor would consider designating the charity as a partial or even sole beneficiary of his or her IRA. Just as the rollover avoids recognition of income, the beneficiary designation avoids the probate process. The proceeds from the IRA are distributed to the charitable organization once the owner passes away.
Collin is 72 years old. Last year, he began taking the required minimum distribution from his IRA. This increased his income so much that he was pushed into a higher tax bracket. He recently visited with his financial advisor and discussed ways to lessen his tax burden in the current year. His advisor mentioned the IRA charitable rollover. Collin learned that he could direct up to $100,000 from his IRA this year to a qualified charity. The amount transferred would count against his RMD, which means he would not have to pay any income tax on the charitable distribution. Collin is excited about this idea. He has been making regular gifts to charity, but by taking advantage of the IRA charitable rollover, Collin can continue to give without having to worry about bracket creep and higher taxes. Collin has also met with his estate planning attorney and has decided to designate his favorite charity as the beneficiary of his IRA. His charitable giving plan now includes making annual charitable gifts through an IRA rollover each year with the balance of the IRA designated to charity when he passes away.
A blended gift is a great way for donors to contribute toward a charity's capital campaign while maintaining assets for use later in life. Donors are able to make an immediate impact on their favorite charities and also establish planned gifts that will continue to benefit those charities for years to come. In addition to the satisfaction of knowing that they are furthering charitable purposes, a blended gifts donor will see substantial tax benefits from his or her gift, whether an immediate charitable income tax deduction, bypass of capital gains or an estate tax charitable deduction.