Estate Planning and Planned Giving Explained


Estate planning is the process by which a person establishes what will happen to his or her assets during their lives and after they die. As part of that process, the term “planned giving” is sure to come up time and again. Estate planning and planned giving are intertwined in many people’s future plans, and understanding the benefits of both is critical in making sound financial decisions for the future.

What is Planned Giving?

Planned giving, sometimes called gift planning, is a method by which a person can support charitable organizations and other non-profit groups with large donations. These donations tend to be larger than one would be able to achieve through donating a portion of income. Donations can come in the form of cash, or they may be assets like real estate, collectibles like artworks, appreciating assets like stocks and bonds, or other items of value, even including life insurance or retirement plan savings. There are several types of planned giving arrangements, sometimes providing a life-long income to the charity or a lump sum during the donor’s life or after they pass away.

In addition to the differing arrangements, there are three types of planned gifts. These are:

  • Gifts payable to a charitable organization upon the donor’s death.
  • Gifts that provide a source of income or other financial benefits to the donor in return for a contribution to a charity or other non-profit organization.
  • Gifts that substitute cash for appreciated assets, such as securities, stocks, real estate, or collectibles.

Planned giving can benefit both the person making the donation as well as the charitable organization receiving the donation. Many people wish to support their favorite charities with funding both in life and after death. Some of those people may want to establish themselves as philanthropists and start a “philanthropic legacy”. The decision to make substantial donations to a charity often comes from the goodwill of a donor, but there are other reasons why someone might want to create a planned gift as part of their overall estate planning picture. One of the primary reasons is that there may be substantial tax deductions available for the donor.

What Tax Benefits are Available for Planned Gifts?

Everyone wants to save money on taxes, especially as we age. Many employees have worked hard to set aside retirement money. Smart savers have also been able to take advantage of tax deductions and tax liability shelters as part of the retirement planning process. This extends into estate planning, where taxes and probate costs can cut into retirement assets quite significantly.

Setting up a planned giving arrangement can have great tax benefits for donors. There are several such benefits, mostly revolving around deductions one can claim on his or her annual tax forms.

The first tax benefit comes when a donor contributes appreciated assets to a charity. As mentioned earlier, appreciated assets can take many forms, but are typically real estate properties, artworks, securities and stocks, and similar objects of worth that have gained value over time. Contributing appreciated assets as a planned gift has a two-fold benefit:  first, one can deduct the full market value of the asset when preparing taxes, and second, the donor pays no capital gains tax on the transfer of those assets to the charity.

The next tax benefit reduces or eliminates estate taxes. Planned gifts that are payable upon the donor’s death to his or her favorite charity, such as a bequest or by naming the charity as the beneficiary on life insurance policies or retirement savings accounts, are exempt from estate taxes. The donor is not eligible for lifetime income tax deductions from this form of a gift, but the surviving heirs won’t have to scramble to pay estate taxes under this gifting arrangement.

Finally, donors who establish a life-income gift can receive a tax deduction for the full market value of any assets contributed to charity minus the current value of any income interest retained by the donor. This arrangement is perfect for those who wish to give a portion of their income to a charity over their entire working career. And, if funding the charity is done through the contribution of appreciated assets, there are no capital gains taxes to worry about.

Becoming a Philanthropist

Many people do not see themselves as philanthropists in life but may choose to establish a planned gift as a means of letting their legacy live on. Many retirement planners understand the desire to keep the legacy alive, and those planners can help guide their clients toward creating planned giving arrangements as part of the overall estate planning picture. Planned giving becomes especially attractive to those people who may not have children or other family members to pass assets to after death; in these cases, charitable organizations can become the beneficiaries of any end-of-life asset distribution.

A smart financial planner will assess the true value of a client’s assets and estate properties in order to determine whether planned giving is right to do. Each case is different, and differing asset values and tax liabilities give planners much to think about when helping their clients make smart financial decisions.

For those who do choose to use planned giving as a means of supporting charitable organizations, it is critical to understand their final wishes. This is particularly true in planned gifts that take the form of lifetime giving arrangements. Setting up agents or powers of attorney to keep that charitable giving pattern functioning is an important part of that process.

Final Words on Planned Giving

When a person is creating an estate plan, planned giving can be part of that process. As with any retirement or asset management plan, the help of a certified financial expert can be very beneficial. Financial planners can help you assess your unique needs and desires and guide you toward the right solutions. If supporting a favorite charity is part of your desires, planned giving may be right for you. You can contribute during life or after death, and may receive significant tax benefits in the process.

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