9 Key Types of Planned Gifts, How They Work, and Examples

Reading Time: 7 minutes

Planned giving is an integral component of any robust fundraising program.

Defined as gifts that are designated for an organization at a future date, planned gifts can provide major support to your institution.

Many nonprofits find planned giving to be an immensely helpful capacity-building revenue stream, as planned gifts are often large and, in many cases, unrestricted. These gifts also offer invaluable opportunities to deepen connections between an organization and its most dedicated supporters and their families.

Below, we break down the most common types of planned gifts and how they work so that your development team can hold more fruitful conversations with prospects who express interest in planned giving.

Key types of planned gifts, each explained in the text below

Bequest

A bequest is a gift of assets through the provisions of an estate plan, such as a will or trust. It can be designated as a specific amount or as a percentage of the donor’s estate. Bequests are deductible from an estate for federal estate tax purposes.

Bequests are among the simplest and most accessible types of planned gift. Any donor can create a bequest in their estate plan. Broadly promoting bequests can be a helpful way to generally increase awareness of planned giving among a nonprofit’s donor base and identify prospects interested in and capable of making larger or more complex planned gifts.

Example: A donor leaves $100,000 to a charity through a bequest in his will. When the will is executed, the charity receives the gift, and the total tax burden of the estate decreases.

Charitable Remainder Trust

A charitable remainder trust is an irrevocable trust that lets an individual donate assets to a charity and draw an annual income for life or a specific period of time. The donor contributes assets to a charitable remainder trust, which generates income for the donor and their beneficiaries before paying the remaining principal of the trust to charity.

There are generally two types of charitable remainder trusts: charitable remainder annuity trusts (CRAT) and charitable remainder unitrusts (CRUT).

Annuity trusts pay the donor and their beneficiaries a fixed dollar annual income payment, while unitrusts pay the donor and their beneficiaries a percentage of the trust’s value. In both cases, donors avoid capital gains taxes on contributed assets, meaning 100% of the principal amount is invested for their benefit. Donors also receive an income tax deduction for the estimated value of the remaining principal that will ultimately go to the charity.

Example: A donor creates a charitable remainder annuity trust with a gift of $500,000 and a $10,000 per year payout.

The donor receives $10,000 payments every year until they pass away, upon which the charity receives the remaining principal. So, if the donor lives for twenty more years, the charity would ultimately receive $300,000 (or more with appreciation factored in).

Charitable Lead Trust

A charitable lead trust is an irrevocable trust designed to provide support to one or more charities for a period of time, with the remaining assets eventually going to family members or other beneficiaries. It is the inverse of a charitable remainder trust.

The donor contributes assets to the charitable lead trust, which generates income for a charity for a set number of years before paying the remaining principal of the trust to the donor’s beneficiaries. Charitable lead trusts reduce the estate taxes on assets passed down to heirs.

Example: A donor creates a charitable lead trust with a gift of $500,000 and a 5% payout rate for ten years.

The charity receives a payment of $25,000 every year for ten years. At the end of ten years, the remaining $250,000 goes to the donor’s beneficiaries. If the appreciation in the account exceeds the 5% payout rate, the beneficiaries could receive much more than $250,000 without an estate tax consequence.

Charitable Gift Annuity

A charitable gift annuity allows a donor to transfer assets to a charity in exchange for fixed payments to the donor for life. Upon the donor’s death, the remaining principal goes to the charity.

Donors can invest 100% of their principal without a capital gains tax, as well as receive a tax deduction based on the estimated amount that will eventually go to the charity.

Example: A donor creates a $100,000 charitable gift annuity with a payment rate of 5%.

The donor receives payments of $5,000 for life according to the terms of the annuity. After the donor’s passing, the charity receives the remaining principal.

Retirement Assets

A donor can designate a charity as a beneficiary of their individual retirement account (IRA).

If the donor is 72 or older, the IRA Charitable Rollover provision also allows donors to make a tax-free gift of up to $100,000 per year directly from their IRA to a charity. These gifts are called qualified charitable distributions (QCDs). A charitable distribution satisfies the donor’s required minimum distribution for that year, and these gifts are also not subject to estate tax.

Example: A donor distributes $50,000 from their IRA to a charity as a QCD.

Life Insurance

A donor can designate a charity as a beneficiary of all or part of their life insurance policy. The donor can name a charity as a beneficiary of an existing policy or take out a new policy and name the charity as the owner and/or beneficiary. Premiums on each policy that is irrevocably transferred to a charity are tax-deductible as charitable gifts when a donor itemizes their taxes.

Example: A donor gives their life insurance policy to a charity and can claim deductions for its premiums.

Appreciated Property

Appreciated property includes stocks and securities, real estate, and personal property, such as art or antiques. A gift of appreciated property to a charity can give the donor a full fair market value income tax deduction and eliminate capital gains taxes on appreciated values.

Example: A donor distributes 200 shares of stock, valued at $12,000, to charity. When the stocks were first purchased several years ago, they cost $5,000, representing a capital gain of $7,000.

Since the stock has appreciated in value since the initial purchase, the donor can likely claim a tax deduction of the full fair market value of the donated securities and avoid capital gains taxes. Note that this is only possible by donating the stock directly to the charity (i.e., not liquidating the stock to donate the cash proceeds).

Pooled Income Funds

A pooled income fund is a type of charitable trust that receives irrevocable contributions from multiple individuals. These contributions are then pooled and invested together, akin to a mutual fund in which the contributors own shares.

The pooled income fund provides fixed payments to these donors. The donors also receive an income tax deduction for direct contributions to the fund. Upon each donor’s death, a portion of the fund representing the amount assigned to that beneficiary (i.e., their shares of the fund) is distributed to the charity.

Example: A donor makes a gift of $50,000 to a pooled income fund, retaining a 5% per year payout for life. Upon their passing, their shares in the fund’s overall value are transferred to the charity, which it can continue investing or liquidate.

Retained Life Estates

In a retained life estate agreement, the donor gives a personal residence, such as a primary home or vacation property, to a charity while retaining the right to live on the property. The donor can keep the right to use the property for the rest of their life or for a set term of years. The donor receives an income tax deduction for the estimated remainder value of the property.

Example: A donor gives a charity their beach house but retains the right to use it for the next ten years. After those ten years have passed, the charity retains full ownership and the right to use or sell the house.

Learn more about Graham-Pelton's nonprofit development support and consulting services

Why Invest in Planned Giving?

Planned giving represents a major opportunity for nonprofit organizations to secure larger and/or longer-term support. This is due to a few factors:

Demographic trends (primarily the “Great Wealth Transfer”) are poised to lead to the disbursement of unprecedented amounts of wealth to beneficiaries in the coming years.
Planned giving can unlock added generosity since these gifts are often deferred and come from saved assets rather than cash.
The tax benefits and estate planning flexibility offered by planned gifts can be highly motivating for wealthy donors.
Planned gifts represent uniquely meaningful opportunities for donors to demonstrate their passion or commitment to a cause. Organizations with longstanding relationships and deep community ties, like healthcare institutions, schools, universities, and houses of worship, are often in the best positions to benefit.

Easy tools exist for donors to create bequests in their wills, but the most effective work a nonprofit can do to secure more planned gifts is to generally raise awareness and start conversations.

By incorporating planned giving prospect markers into your development team’s typical qualification workflows, you can identify potential donors and gauge their interest in making deferred or more complex gifts.

Important Note

Some of these philanthropic vehicles bring complex details, nuances, and legal/financial ramifications. When discussing planned giving with prospects and donors, never offer direct financial, investing, or estate planning advice.

Always direct your supporters to consult with relevant tax, financial planning, or legal professionals if they want explicit advice.

For nonprofits that want to build a robust planned giving pipeline, consulting with experts can give you the confidence and buy-in you need to succeed.

The Graham-Pelton team brings years of experience working with diverse missions to accomplish their fundraising goals. Our expertise in sectors like healthcare and higher education philanthropy makes us uniquely positioned to help organizations navigate the complexities of building a new giving program and adopting best practices.

To learn more, please contact our team today or continue learning with these additional resources: