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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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 The insurance company guarantees that a specific value in death benefit will be paid as long as premium payments are made on time regardless of investment performance, mortality experience, or other vagaries during the life of the insured.

 Universal or Variable Life Insurance – Both the premium amount and the value of the death benefit may be adjusted during the course of the policy.

 Similar to whole life policies, excess premiums are accumulated to be invested and used later to pay the cost of insurance.

 Most of the variables, including the cost of insurance, mortality assumptions, investment return and value of death benefit, are not guaranteed and can be adjusted from time to time.

 The policy owner may be provided some opportunity to select the investments owned by the policy.

 Limited Payment or “Vanishing Premium” Plans  A limited number of annual premiums are projected, after which a sufficient policy value is expected to have accumulated in order to pay the cost of insurance for the lifetime of the insured.

 Single Premium or “Paid Up” Life Insurance  One very large premium is paid at the time of purchase, most of which is set up as an investment account to pay the cost of insurance for the lifetime of the insured.

Life Insurance Vocabulary Life insurance employs a very specific and technical vocabulary. An understanding of several

key terms will be helpful in the evaluation and comparison of charitable life insurance proposals:

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Outright Contributions of Life Insurance If a charity is named as the “beneficiary” of the policy, the charity will receive the death benefit amount when the insured dies.

If, instead, the donor assigns “ownership” of the policy to charity (in addition to naming the charity as the beneficiary), the donor receives a current income tax deduction for “interpolated terminal reserve value” (basically the “cash value,” subject to certain adjustments) of the policy.

In addition, if the donor makes premium payments on the policy after it has been contributed to the charity, he or she can receive an income tax charitable deduction for those amounts too.

Policy loans, withdrawals, and other obligations may decrease, sometimes


significantly, the value of the policy to the charity.

Tools of the Trade Page 8 © 2014 Craig C. Wruck Donors should be advised that the charity, as owner of the policy, has sole discretion to make

decisions that will affect the value of the policy to the charity:

Further premium payments – the charity is not obligated to make any further premium payments on the policy Policy loans – the charity can borrow the cash value from the policy Paid-up insurance – the charity may elect to accept a smaller death benefit and eliminate the need for further premium payments “Wealth Replacement” Life Insurance Since planned gifts often remove estate assets that would otherwise have gone to surviving heirs, life insurance naming the heirs as the beneficiary can provide a cost-efficient way to replace the assets given to charity.

Those donors who are concerned about estate taxes can work with their financial advisors to ensure that wealth replacement policies are owned by the heirs. Ownership by the heirs can avoid estate taxes on wealth passed to the next generation.

Evaluating Life Insurance Contributions It seems there is a never-ending array of programs promoting creative applications for life insurance in charitable giving. Before engaging in any life insurance program, the charity should engage in a careful review of the proposal to ensure that there is real value for the charity.

The Partnership for Philanthropic Planning (formerly National Committee on Planned Giving) has published guidelines for the evaluation of life insurance. These guidelines are available from the Partnership’s Web site http://www.pppnet.org/pdf/life-insurance-guidelines.pdf. The key

elements of the recommended review are:

Complete Analysis – Careful analysis of both the subjective and objective factors is key.

Some aspects of charitable life insurance programs lend themselves to quantitative analysis, while other aspects are more qualitative in nature. A worthwhile charitable life insurance program will meet both subjective and objective criteria.

Value and Values – The analysis should guard both the value and the values of the charitable organization today and in the future. Even though a charitable life insurance program may be financially viable, it may still present unwarranted risk to reputation and/or consume unreasonable amounts of valuable staff time and resources.

Nothing is Free – Nothing of value comes without a price. All of the costs of the charitable life insurance program, including the costs of insurance, borrowing, commissions, and on-going administration, must be paid by someone at some point. The charity should have a clear understanding of all of these costs and the sources of the funds to pay these expenses, as well as the ultimate source of the value the charitable organization expects to receive.

Tools of the Trade Page 9 © 2014 Craig C. Wruck Charitable Interest – The charitable life insurance program must respect and serve the charitable interests of the donor.

Obligations and Commitments – Charitable organizations should fully understand the obligations involved in a proposed charitable life insurance program and the impact should the program not unfold as planned. Interest rates, mortality assumptions, and the cost of insurance are all variables that may increase or decrease the charity’s out-ofpocket expenses over time.



Even though the vast majority of planned gifts are simple charitable bequests, successful development officers still find it well worth their while to maintain at least a conversational knowledge of the more advanced planning giving methods. First of all, these advanced planned gifts are, for the most part, irrevocable, and therefore arguably better for the charitable organization because they cannot be changed or revoked like a simple bequest. In addition, the development officer who has a working knowledge of advanced planned giving methods is in a better position to be of service to his or her donors and can be helpful to them in creating charitable gift plans that benefit the donor and the organization.


In the simplest terms, a “life income gift” is a plan that allows a donor to make a contribution to charity and receive an income in return. Depending upon the plan, the income may be fixed or variable and it can go on for one or more lifetimes, a term of years, or a combination of the two.

Later we will explore a number of specific plans. However, they have the following features in


 are irrevocable once the contribution has been made  provide a current income tax deduction for the calculated value of the charitable gift  can be made during lifetime or included in a Will or other testamentary instrument  subject to both Federal and state laws Life income gifts offer distinct advantages—and disadvantages—for both the donor and the


 For the donor – the ability to receive income, avoid capital gains tax, and shift investment strategies are advantages. However, donors must also consider that these gifts are irrevocable and there is very little flexibility should the donor wish to make changes after the gift is made  For the charity – the irrevocability of these gifts is an advantage compared to other planned gifts which can be changed or even revoked without the charity being aware.

However, the charity must consider that it will need to establish relationships— sometimes lifelong—with the donor and beneficiary and take responsibility for fiscal and fiduciary matters Tools of the Trade Page 10 © 2014 Craig C.

Wruck Types of Life Income Gifts Charitable gift annuity  Money, property, or other assets are irrevocably given to a charity now in exchange for a contractual promise to pay a fixed amount each year to one or two beneficiaries  The amount of payment is set at the time the gift is made and cannot be changed  One or two annuitants are named at the time the gift is made and cannot be changed  The date of the first annuity payment may be delayed (deferred payment gift annuity)  Payments are backed by the charitable organization that issues the gift annuity Charitable remainder trust  Money, property, or other assets are irrevocably transferred to a trustee with instructions to pay income to one or more income beneficiaries for a period of time and then to transfer the funds remaining in the trust to charity  Two types:

 Annuity trust – pays a fixed dollar amount to the income beneficiaries  Unitrust – pays a fixed percentage of the value of the trust, as re-determined annually, to the income beneficiaries  Trustee may be the charity, a trust company, an individual, or others  Payout method (annuity or percent of trust value), rate or amount of payout, income beneficiary(ies), and other terms of trust are set at the time the gift is made and cannot be changed Pooled income fund  Many donors irrevocably contribute money, property, or other assets to a pooled investment fund operated by a charity  Income beneficiaries are paid a share of the fund’s net income proportionate to the value of their contribution  As income beneficiaries die, their share of the fund is withdrawn for use by the charity

By the Numbers

Since a life income gift donor contributes only a partial interest (the donor retains the right to income), the income tax charitable deduction is less than the fair market value of the property or

money contributed. Following is a brief overview of the calculation of the deductible amount:

 In general, the charitable deduction is for the estimated value of the contribution to the charity—the value of the money or property contributed, minus the value of the right of the income beneficiary to receive income Tools of the Trade Page 11 © 2014 Craig C. Wruck  Formulae, factors, and other variables are specified by U.S. Treasury Regulations  Charitable Gift Annuity  Begin with the amount of cash or the fair market value of property or other assets contributed  Then subtract the present value of the lifetime annuity (which represents the value retained by the donor)  The result is the amount of the charitable deduction  Charitable Remainder Trust or Pooled Income Fund  Begin with the amount of cash or the fair market value of property or other assets contributed  Then subtract the present value of the income expected to be paid to the beneficiaries (which is the value retained by the donor)  The result is the amount of the charitable deduction  General rules of thumb:

 Older beneficiaries, lower payouts = larger deduction – the older the beneficiary and/or the lower the payout, the larger the deduction because the charity can be expected to pay less to the income beneficiary thus leaving more for charity  Younger beneficiaries, higher payouts = smaller deduction – the younger the beneficiary and/or the higher the payout, the smaller the deduction because the charity can be expected to pay more to the income beneficiary. It is also true that more beneficiaries leads to a smaller deduction.

 Technology to the rescue!

Fortunately for development officers, readily available software can provide quick and accurate calculations. Applications like Planned Giving Manager software by PG Calc® can calculate deductions and compare different gift plans and options (e.g., sell and reinvest versus make a contribution). In addition the software can model financial results over time and prepare appealing presentations and formal documentation.

 Note that annuity interests (those paying a fixed dollar amount) are more affected by CMFR fluctuations than unitrust interests. The CMFR fell to historically low rates during the financial crisis and has remained low, making the deduction for charitable gift annuities and charitable remainder annuity trusts relatively low and the deduction for charitable lead annuity trusts and retained life estates relatively high.


A charitable gift annuity is a contractual promise issued by the charity to pay a fixed dollar amount annually for the lifetime of one or two individuals. The contract is issued in exchange for a contribution. Gift annuity contracts are fully backed by the financial assets of the charity that issues the annuity.

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Payments to the income beneficiary (annuitant) must be at least annual but can be more often.

Quarterly is a common payment schedule. Payments can start now or at some fixed date in the future (a “deferred payment gift annuity”).

The amount of the annuity is fixed at the time the gift is made and cannot be changed. Although the amount can be negotiated between the charity and the donor, in most cases the amount is set by referring to the rates suggested by the American Council on Gift Annuities. For example, following are the latest (effective 1/1/2012, unchanged as of 4/8/2014) suggested rates for a

single-life gift annuity for various ages:

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PG Calc’s Planned Giving Manager software is regularly updated with the ACGA’s most current suggested rates. Current suggested gift annuity rates for both single and two-life gift annuities are available at the American Council on Gift Annuities Web site: http://acga-web.org Annuitants (Beneficiaries) There can be no more than two beneficiaries of a charitable gift annuity contract, and they both must be named at the time the gift annuity is issued.

Taxation of Annuity Payments Tools of the Trade Page 13 © 2014 Craig C. Wruck

The payment to the beneficiary of a gift annuity is taxed as follows:

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