Leaving charitable bequests in a will is the most popular way for donors to make planned gifts. Yet, they're far from the only way. From simple gifts to complex trusts, there are many different types of planned gifts.
What are the primary types of planned gifts?
Planned charitable contributions fall into three main categories that your nonprofit should know:
- Deferred gifts of cash or other assets
- Gifts that pay an income
- Gifts that protect a donor’s assets
Each gift type has different requirements and advantages depending on a donor’s financial circumstances, so they’ll often appeal to different segments of your donor base. Understanding these distinctions will allow you to secure support and explain the full range of legacy giving options to your donors more effectively.
Deferred planned gifts
These types of planned gifts are ‘deferred’ because a nonprofit only receives them after the donor passes. Deferred planned gifts are fairly simple to give, usually only requiring the donor to name a nonprofit as the beneficiary for part of their estate or retirement accounts.
Bequests are one of the simplest, most impactful, and most popular ways to make a planned gift. They made up 9% of all charitable giving in the USA in 2018. What’s more, the average bequest left by a will-maker on FreeWill is $50,424.
To make a charitable bequest, a donor has to allocate a portion of their estate to a nonprofit in their legal will. They are usually allocated in three ways:
- A specific amount of cash (e.g., $10,000);
- A percentage of the donor’s total estate (e.g., 10% of an estate of $1 million would be $100,000 to charity); or
- The remaining value of the estate after all other bequests have been paid.
Bequests are a great option for everyone as they don't cost a donor anything during their lifetime.
Retirement plans & life insurance
Donors can name a nonprofit as the beneficiary of their life insurance policies or unused retirement assets. These can include individual retirement accounts (IRAs), 401(k)s, 403(b)s, or pensions. Because these gifts are often larger than what a donor could give in their lifetimes, they can significantly impact a nonprofit.
These types of planned gifts are a good option for donors who have paid-up policies or retirement accounts that they won’t use. If a donor has a large estate, gifting retirement accounts and life insurance policies can help their heirs avoid income and estate taxes.
The types of planned gifts that pay income
Life income gifts require a long relationship between the donor and nonprofit organization. With these types of planned gifts, nonprofits receive a large donation, invest the funds, and pay an income to the donor for the rest of their life.
Charitable gift annuities
With charitable gift annuities, donors give an irrevocable gift of cash or securities to a nonprofit in exchange for a fixed income payment for a set term or for life. The donor can take an immediate tax deduction while the nonprofit can invest and grow the funds. When the donor passes or the annuity terms are up, the nonprofit keeps the leftover funds. Some donors choose to defer their annuity payments until they retire, resulting in higher payments.
Charitable gift annuities are a smart giving option for donors who want to make a large gift while still protecting their income. These donors may want to ensure the future of their own retirement funds or their children’s as well. Or they may have already retired and want to enjoy a yearly income while still making a significant impact on a cause they care about.
Charitable remainder annuity trusts
With a charitable remainder annuity trust, the donor contributes cash or appreciated securities. They then receive a fixed income based on a percentage of the initial assets used to fund the trust.
The nonprofit can invest the funds, while the donor can avoid capital gains or estate taxes. At the end of the annuity trust’s term, the remaining balance goes to the nonprofit. These contracts usually give a donor an income for a term of up to 20 years or for life.
Annuity trusts are best for donors who want to make a major gift while still ensuring that their income increases from their assets.
Charitable remainder unitrusts
A charitable remainder unitrust is a little more flexible than an annuity trust. It pays the donor a fixed percentage of the fair market value of the trust’s assets and is revalued annually. If the value of the assets increases, the payments increase. But if they decrease, so do the payments. Like annuity trusts, the remaining balance goes to the nonprofit, and the terms are usually set for up to 20 years or for life.
This type of planned gift is a good bet for donors who want to protect their income against inflation. Unitrusts are also beneficial for donors who need more flexibility, as they can use almost any assets to fund it, such as stock or real estate.
Pooled income funds
Nonprofits create and maintain pooled income funds — a type of charitable trust. These funds pool together many donor contributions for investing purposes. The nonprofit pays these donors an income based on their share of the fund and the performance of the investments. Nonprofits only see money from these funds when a participating donor passes away. At that point, they receive the donor’s share.
Donors who contribute to a pooled income fund can see an immediate income tax deduction and avoid capital gains tax on any appreciated assets they contribute. These funds are a good fit for donors interested in the stock market and comfortable with a variable income.
The types of planned gifts that protect a donor’s assets
Sometimes donors don’t want to give up their assets completely when making a gift. In these circumstances, there are a couple of ways for them to give while still having a significant impact.
Charitable lead trusts
When donors make a gift through a charitable lead trust, the nonprofit gets a fixed income stream. Lead trusts are the opposite of a charitable remainder trust. However, they are also fixed to a specific term length or the donor’s lifetime. When the term ends, the assets return to the donor or their beneficiaries instead of the nonprofit. Lead trusts are an excellent way for nonprofits to diversify their funding channels and ensure they have a set amount coming in each year.
For donors, charitable lead trusts can reduce estate taxes, while still transferring wealth to their heirs. Because the primary benefit is reducing estate taxes, these planned gifts are best for wealthy donors with significant estates.
Retained life estates
With retained life estates, a donor transfers a property deed or title to a nonprofit while retaining the right to use the property. Unlike a charitable lead trust where the asset returns to the donor, retained life estates belong to the nonprofit after the set term is up. At that point, the nonprofit can sell or keep the property for its own use.
This type of planned gift is great for donors who want to simplify their estate settlement process and reduce estate taxes. Like most planned gifts, they can also receive an income tax deduction for the property's value.
Getting started with new legacy giving options
The world of planned giving extends far beyond bequests alone. Familiarizing your organization with the primary types of planned gifts will enable you to better speak to them with donors and make it possible to recognize ideal prospects over time.
We recommend creating donor profiles that compile the key philanthropic, wealth, and motivational markers that indicate a prospect may be interested in a particular type of planned gift. From there, you’ll have a solid starting point from which to grow your planned giving program. Add planned giving to your nonprofit's Ways to Give page, and create a dedicated Planned Giving Website to serve as your program's digital home and host educational content about all of the planned giving options available to donors.
To learn more, get in touch with FreeWill to discover if your nonprofit has already been named as a beneficiary in a donor’s will, and keep learning about planned gifts with these resources:
- The benefits of planned giving for nonprofits and donors
- How to start a planned giving program: Step-by-step guide
- Planned giving marketing: 7 strategies and ideas you need
- How to find planned giving prospects: 4 steps