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«BASIC PLANNED GIVING METHODS INTRODUCTION No doubt the simplest and most straightforward gift is an outright contribution for the unrestricted use of ...»

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Tools of the Trade

Minnesota Planned Giving Council

November 4, 2014

Presented by:

Craig C.Wruck

Vice President of University Advancement

Humboldt State University

1 Harpst Street

Arcata, CA 95521

Phone: (707) 826-5145


(Text adapted from the book Planned Giving in a Nutshell and used with permission.)



No doubt the simplest and most straightforward gift is an outright contribution for the unrestricted use of the charitable organization … preferably in cash. However, there are a great number of other ways in which a contribution can be made. Some charitable gift plans can provide an income or stream of payments to the donor or others. Some allow significantly greater tax advantages than a simple outright contribution. Others can allow a donor to meld complex financial and estate planning goals with charitable objectives.

Why pursue these alternatives, especially given all their added complexity? First, the charity will provide a valuable service to its most loyal donors by working with them to create charitable gift plans that meet the donors’ needs as well as those of the organization. In addition, by offering the full range of charitable giving opportunities the organization will appeal to a much wider audience. Finally, other charitable organizations will offer alternatives and so, if only as a matter of keeping current, your charitable organization should be familiar with these more sophisticated methods of charitable giving.


A testamentary charitable gift is simply a formal direction or instruction to transfer money, property, or other assets to a charity at death. The testamentary gift is usually made by executing a formal legal instrument during lifetime. Typical tools for making testamentary gifts include charitable bequest provisions in Wills and trusts as well as beneficiary designations on all manner of financial instruments and accounts.

What is the appeal of testamentary charitable giving?

Tools of the Trade Page 1 © 2014 Craig C. Wruck For the donor there is an intuitive appeal. A testamentary contribution is a logical extension of one’s lifetime accomplishments and ambitions. It is a way to make a final statement about one’s visions and beliefs. Testamentary giving also provides the donor with an opportunity to accommodate various contingencies and conditions specific to his or her circumstances. Finally, a testamentary gift, unlike other kinds of charitable gifts, preserves flexibility for the donor in that it can be modified, or deleted completely, if the need arises.

Testamentary gifts appeal to charitable organizations because they provide an opportunity to seek support for long-term needs without disrupting fundraising for current needs. In addition, testamentary gifts provide an opportunity to identify and address entirely new groups of constituents. Even those who are either maximizing their current giving or who are unable or unwilling to give currently can be asked to consider a testamentary gift. Indeed, testamentary gifts can be a key prospecting and cultivation step in pursuit of further gifts of all kinds.

Finally, there is a large potential audience for testamentary giving. According to research conducted by the Partnership for Philanthropic Planning less than 8% of the population has included a charitable bequest in their estate plans. And, of those who have, only one in four has notified the charity of their plans.

The Probate Process

Prior to considering specific types of testamentary contributions, we will first briefly review “probate,” the process by which an estate is administered and settled. Although the term “probate” has specific legal meaning, it is frequently used by non-lawyers to describe all of the steps and processes involved in gathering, administering, and distributing an estate following the death of an individual.

The rules governing estate administration vary from state to state, and the process is usually carried out under some level of court supervision. In broad strokes, these are the steps that must

be taken to settle and distribute an estate:

1. The Executor (the one responsible for managing and administering the estate) must locate the Will (or other testamentary documents) and submit it to the Court for certification and appointment as Executor. An opportunity is provided for others to object to the appointment of the Executor or question validity of the Will.

2. Once appointed, the Executor has legal authority over the estate and its assets and is responsible for locating, preserving, and maintaining property and assets of the estate.

3. The Executor must take an inventory and value all of the assets and property in the estate, and must account for all expenditures and income during administration of the estate.

4. The Executor must attempt to identify all creditors or others who may have a claim against the estate. This usually includes advertising to notify those who believe they may have a claim so that they have an opportunity to come forward and seek payment.

5. Then the Executor pays the valid claims and denies others. At this point a court hearing may be held to allow those who have not been paid to have an opportunity to object.

6. The final income tax return and estate tax return are prepared and filed.

–  –  –

The entire process can easily take a year or more following the death of the donor. Charities should monitor the process and, while exercising patience, be vigilant to make certain that the process is moving along and to ensure that the donor’s charitable wishes are carried out.

Charitable Bequests The most straightforward way to make a testamentary gift is by a charitable bequest—a provision included in a Will or trust directing a gift to charity upon the death of the donor. There is an almost endless variety of ways in which a charitable bequest can be structured. Some of the

most common forms are:

Specific bequest – an exact amount, or a specific item, is left to charity  “I bequeath the sum of $100,000 to...”  “I direct my Executor to distribute my collection of barbed wire to…” Percentage bequest – a percentage or fraction of the estate is left to charity, often used with a remainder or residue provision  “I bequeath 50% of my estate to …”  “I direct my Executor to distribute one-half of the remainder to…” Bequest of remainder or residue – directs that what is left (if anything) after other distributions should be given to charity, often expressed as a percentage  “I bequeath all of the rest remainder and residue of my estate to...”  “I direct my Executor to distribute one-third of the remainder to…” Contingency bequest – a contribution is to be made only if certain other things happen first (e.g., my spouse dies before I do)  “If I am trampled to death by a herd of buffalo in the starboard isle of a westbound Boeing 747, then I bequeath...”


Donors often wish to provide instructions or restrictions as to how their charitable bequest should be used. These restrictions can become problematic if the direction is unclear, or if it is impractical. Ultimately, the charity may be forced to decline the bequest if the restriction is unacceptable.

In order to avoid these complications, charities often suggest that the donor set forth the restrictions in a memorandum or other written document negotiated with the charity. Then, the provision in the Will can direct that the bequest “...be used in accordance with the most recent

–  –  –

In addition, it is prudent to ask donors to include “safety valve” language, such as:

“If the Board of Directors determines that it has become unwise or unnecessary to use this gift for the purposes I have specified, then I direct that this gift be used for other purposes the Board of Directors may designate, bearing in mind my original intention.”


There are a number of retirement plans under current tax law. “IRA,” “Keogh,” “401(k),” and “403(b),” are just a few of the “qualified retirement plans.” Qualified retirement plans are designed to encourage individuals to save money to be used to provide income in their retirement years.

In general, qualified retirement plans offer the opportunity to set aside pre-tax income and invest that money on an income tax deferred basis. Since no taxes are paid on the money as it is earned, nor as it is invested and grows, withdrawals from qualified retirement plan are subject to income tax.

In addition, since these programs are designed specifically to provide retirement income, they are subject to a number of rules that make it unattractive to use them for other purposes. There is a minimum age (generally 59½) before which withdrawals are subject to a penalty. In addition there are requirements mandating minimum withdrawals each year, generally beginning at age 70½.

In general, qualified retirement plans are not a good source of funds for lifetime charitable gifts because the donor will have to recognize as taxable income any amounts withdrawn from the account. Even though the charitable deduction can offset the additional taxable income, the complexities involved—including the likelihood that the administrator will be required to deduct standby withholding— make lifetime gifts from qualified plans unattractive to donors. Note that a special temporary rule which expired at the end of 2013 simplified certain lifetime contributions of IRA assets for donors age 70½ or older (see “Charitable IRA Rollover” below).

In any case, qualified retirement plan assets make an excellent testamentary gift. The reason is

very simple:

 Any amount left in a qualified retirement plan at death is treated as though it was withdrawn by the estate. The effect is that the total amount left in a qualified retirement plan at death is subject to income tax. What is worse, the taxable income on an individual’s final income tax return is often higher than in prior years resulting in a higher marginal income tax rate and perhaps triggering the Medicare surtax.

 However, transfers from a qualified retirement plan directly to charity at death escape the income tax completely!

–  –  –

“Charitable IRA Rollover” A special rule that expired at the end of 2013 allowed certain donors to use their IRA assets to make a “qualified charitable distribution” without incurring income tax on the withdrawal from the IRA. Although this opportunity is not currently available, legislation is pending that would reinstate the provision. Congress has previously extended the charitable IRA rollover subject to

several limitations:

 The donor must be age 70½ or older at the time the gift is made.

 The account must be a traditional Individual Retirement Account (IRA) or Roth IRA.

 The contribution must be outright (no life income plans).

 Total IRA rollover contributions cannot exceed $100,000 for the year.

 The transfer must be from the IRA administrator directly to the charity (the donor cannot withdraw the money and then make a contribution to the charity).

 Contributions must be to a public charity. They cannot be to a donor advised fund, supporting organization, or private foundation.

Tools of the Trade Page 5 © 2014 Craig C. Wruck Note that the donor does not receive an income tax deduction for a qualified charitable distribution.

The charitable IRA rollover appealed to donors for reasons that include:

 It is relatively simple to complete.

 It does not increase the donor’s taxes, even if the donor’s charitable deductions are limited in some way or the donor does not itemize deductions.

 It counts toward the donor’s required minimum distribution.


Life insurance is a powerful and flexible financial and estate planning tool. For charitable giving purposes, the value for the charity lies in receiving the “death benefit” that is paid upon the death of the insured. However, policy loans, withdrawals, and other obligations can reduce the dollar amount coming to the charity.

Life Insurance Basics

Before we discuss the practical applications of life insurance as a charitable gift, a brief review

of the basics of life insurance:

 Policy – Life insurance is a legal contract (the “policy”) promising to pay a certain amount (the “death benefit”) upon the death of an individual (the “insured”).

 The insurance company seeks a large number of people to insure in order to spread the risk of having to pay the death benefit in any one year.

 The company charges a fee (the “premium”) for the policy and uses this money to pay death benefits to the beneficiaries of those insureds who die.

 Term Life Insurance – “all life insurance is term insurance”  The policy covers one life for a specified period of time (usually one year).

 The amount of the premium increases each year as the likelihood of paying the death benefit during that year increases because the insured is older.

 Annual renewable term – The insurance company promises to renew the coverage each year—but at a higher premium for the same death benefit.

 Decreasing term – The insurance company promises to renew the coverage each year for the same premium, but with a smaller death benefit.

 Whole Life Insurance – The premium stays the same and the coverage stays the same for the life of the insured.

 In the early years the premium for a whole life is significantly higher than for the same coverage under a term insurance policy.

Tools of the Trade Page 6 © 2014 Craig C. Wruck  The extra premiums collected in the early years are accumulated and invested to be used to pay the higher cost of insurance in later years when the insured is older.

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