Planned Giving Programs (PGPs)

Why PGPs are Needed and

How to Get One Started

By:

Brian R. Della Rocca, LL.M. (Taxation)

301.587.2241 bdellarocca@kdrlawgrouppa.com

www.kdrlawgrouppa.com

Failure of Non-Profits

Other than poor leadership and lack of focus, failure to raise money to support the organization leads to the demise of many non-profit organizations

Current vs. Future Collection

Many new, struggling Non-Profits seek current donations due to the urgent need to raise money.

Fail to recognize the importance of future giving programs.

Not just a problem of new Non-Profits, older, more established Non-Profits do not always recognize the importance of future giving or simply are too focused on current giving to worry about the future.

Current Giving: Cash

“Cash is King!”

The most common form of giving to Non-Profits.

Current Giving: Tangible Personal Property

Not ideal for every Non-Profit but giving an automobile, furniture, and clothing can provide a Donor with a very nice income tax deduction.

Ideal for Non-Profits who provide these types of items to needy individuals.

Not ideal for Non-Profits who would have to sell the items to obtain a benefit from them.

Current Giving: Appreciated Securities

Great way for Donor to receive a charitable deduction while removing highly appreciated securities from the Donor’s account.

Avoids capital gain recognition for the Donor.

Non-Profit can either hold on to the securities or turn around and sell the securities and take the cash.

Ideally are publicly traded but can be close-corporation securities as long as securities are marketable.

Current Giving: Real Estate

Great way for Donor to receive a charitable deduction while removing appreciated real property from the Donor’s estate.

Avoids capital gain recognition for the Donor and helps to reduce value of estate.

Non-Profit can either hold on to the real property or sell the real property and take the cash. This may not be ideal for a Non-Profit depending on the location of the real property.

Current Giving: Retirement Assets

Donors over 70 ½ years can give up to $100,000 (which includes the Donor’s required minimum distribution (RMD)) to a Non-Profit of their choice and the donated $100,000 will NOT be included in the Donor’s adjusted gross income (AGI) in that year.

• While the Donor will receive a charitable deduction (with a 5 year carry-over) for the donation, that is not the biggest benefit.

• The reduction of the Donor’s AGI is a big benefit as many income tax deductions are based on a taxpayer’s AGI.

• Lowering your AGI may make the Donor eligible for many additional income tax deductions.

Example

• Donor (70 years old) gifts $100,000 (“Gift”) from her IRA to Non-Profit A.

• $50,000 of the donation is the Donor’s RMD.

• Donor has other income of $75,000.

• Donor has medical expenses of $6,000.

• With the RMD included in Donor’s AGI, the Donor’s AGI is $125,000 so the Donor cannot deduct her medical expenses which are only 4.8% of her AGI (income tax laws require medical expenses exceed 7.5% of AGI to be deductible).

• Without the RMD included in Donor’s AGI, the Donor’s AGI is only $75,000 so her medical expenses are deductible because they are 8% of her AGI.

• BONUS: Donor also receives a charitable deduction of about $37,500 and can carry over the remaining value of the donation for 5 years.

Types of Planned Gifts

Wills/Revocable “Living” Trusts (RLT): Bequests/Distributions from a Will or RLT upon death of Donor.

Retirement Assets: Can be used as both deferred and current giving.

Life Insurance: Giving upon death of Donor.

Charitable Trusts: Can be used as both deferred and current giving.

Pooled Income Fund: Form of deferred giving.

Deferred Giving: Wills/RLTs

Direct bequests or distributions from a Donor’s estate or trust after death.

Donor’s estate receives dollar for dollar charitable deduction on estate tax returns (as opposed to only receiving a charitable deduction for a percentage of the donation on the Donor’s income tax returns during his lifetime).

Donor does not feel financial impact of donation and family frequently does not either.

Donor does not have to be wealthy – a bequest/distribution of a small percentage of the Donor’s estate/trust will have a small impact on the Donor’s legatees/beneficiaries but may have a major impact on a nonprofit organization.

Deferred Giving: Retirement Assets

Donor can designate a Non-Profit as the recipient of all or a portion of the Donor’s retirement assets after the Donor’s death.

Benefit to Donor’s Estate: Estate Tax Charitable Deduction.

Benefit to Income Taxable Recipients: Donor is able to fund bequests/distributions to those recipients in alternate, non-income taxable ways.

Example: Funding Charitable Bequest with Retirement Assets

Decedent has $6 million Estate which includes a retirement account of $750,000. Decedent leaves 2 living children who will receive equal shares of her estate.

Decedent wants to leave $600,000 to Non-Profit to avoid federal estate tax liability (current exemption of $5.49 million) leaving children with $2.7 million each.

If Decedent leaves non-retirement assets to Non-Profit, children will each receive $375,000 of retirement assets which will be reduced by income taxes when withdrawn leaving them with $2.325 million of non-income taxable inheritance.

If Decedent leaves $600,000 to Non-Profit using retirement account, children will only receive $75,000 of retirement assets and the remaining $2.625 million will not be subject to income taxation.

Deferred Giving: Life Insurance Death Benefits

Donor can designate a Non-Profit as the recipient of all or a portion of the Donor’s life insurance proceeds after the Donor’s death.

Benefit to Donor’s Estate: Estate Tax Charitable Deduction.

Deferred Giving: Charitable Trusts

Charitable Remainder Trusts (CRTs)

• Donor receives income for life or for a term of years and the designated Non-Profit(ies) receives a lump sum distribution of the remainder after Donor’s death or the expiration of the term of years.

• Donor receives a current charitable deduction based on the value of the initial contribution less the value of the retained income interest.

Charitable Lead Trusts (CLTs)

• Non-Profit receives income for Donor’s lifetime or for a term of years and the Donor’s family receives a lump sum distribution of the remainder after Donor’s death or the expiration of the term of years.

• Donor receives a current charitable deduction based on the value of the initial contribution less the value of the interest calculated to be distributed to Donor’s family.

• CLTs can also be used in a Donor’s Will/RLT to significantly reduce the Donor’s estate tax liability.

Charitable Remainder Annuity Trust Example (Slide 1)

Trust Term: Life

Transfer Date: 1/2017

§7520 Rate: 1.60%

FMV of Trust: $1,000,000.00

Growth of Trust: 8.00%

Percentage Payout: 5.000%

Payment Period: Quarterly

Lives: 1

Age: 65

Charitable Remainder Annuity Trust Example (Slide 2)

Amount of Annuity to Donor: $50,000.00

One Life Annuity Factor: 14.8987

Payout Frequency Factor: 1.0060

Present Value of Annuity =

Annuity Payout times Factors: $749,404.61

Charitable Remainder =

FMV of Trust less PV of Annuity: $250,595.39

Charitable Deduction for Remainder

Interest: $250,595.39

Donor's Deduction as Percentage of

Amount Transferred: 25.059%

Charitable Remainder Annuity Trust Example (Slide 3)

Year Principal Growth Payment Remainder

1 $1,000,000.00 $78,500.00 $50,000.00 $1,028,500.00

2 $1,028,500.00 $80,780.00 $50,000.00 $1,059,280.00

3 $1,059,280.00 $83,242.40 $50,000.00 $1,092,522.40

4 $1,092,522.40 $85,901.80 $50,000.00 $1,128,424.20

5 $1,128,424.20 $88,773.92 $50,000.00 $1,167,198.12

6 $1,167,198.12 $91,875.84 $50,000.00 $1,209,073.96

7 $1,209,073.96 $95,225.92 $50,000.00 $1,254,299.88

8 $1,254,299.88 $98,844.00 $50,000.00 $1,303,143.88

9 $1,303,143.88 $102,751.52 $50,000.00 $1,355,895.40

10 $1,355,895.40 $106,971.64 $50,000.00 $1,412,867.04

11 $1,412,867.04 $111,529.36 $50,000.00 $1,474,396.40

12 $1,474,396.40 $116,451.72 $50,000.00 $1,540,848.12

13 $1,540,848.12 $121,767.84 $50,000.00 $1,612,615.96

14 $1,612,615.96 $127,509.28 $50,000.00 $1,690,125.24

15 $1,690,125.24 $133,710.00 $50,000.00 $1,773,835.24

16 $1,773,835.24 $140,406.80 $50,000.00 $1,864,242.04

17 $1,864,242.04 $147,639.36 $50,000.00 $1,961,881.40

Summary $1,000,000.00 $1,811,881.40 $850,000.00 $1,961,881.40

Charitable Lead Annuity Trust Example (Slide 1)

Trust Term: Life

Transfer Date: 1/2017

§7520 Rate: 1.40%

FMV of Trust: $1,000,000.00

Growth of Trust: 8.00%

Percentage Payout: 7.000%

Payment Period: Quarterly

Lives: 1

Age: 65

Charitable Lead Annuity Trust Example (Slide 2)

Annual Payout to Non-Profit: $70,000.00

Quarterly Payment: $17,500.00

Single Life Annuity Factor: 15.2163

Payout Frequency Factor: 1.0052

Present Value of Annuity Limited by

§7520 Regs:

$830,902.64

Remainder Interest = FMV of Trust

less PV of Annuity:

$169,097.36

Charitable Deduction for Income

Interest:

$830,902.64

Donor's Deduction as Percentage of

Amount Transferred:

83.090%

Charitable Lead Annuity Trust Example (Slide 3)

Year Principal Growth Payment Remainder

1 $1,000,000.00 $77,900.00 $70,000.00 $1,007,900.00

2 $1,007,900.00 $78,352.00 $70,000.00 $1,016,432.00

3 $1,016,432.00 $79,214.56 $70,000.00 $1,025,646.56

4 $1,025,646.56 $79,951.72 $70,000.00 $1,035,598.28

5 $1,035,598.28 $80,747.88 $70,000.00 $1,046,346.16

6 $1,046,346.16 $81,607.68 $70,000.00 $1,057,953.84

7 $1,057,953.84 $82,536.32 $70,000.00 $1,070,490.16

8 $1,070,490.16 $83,539.20 $70,000.00 $1,084,029.36

9 $1,084,029.36 $84,622.36 $70,000.00 $1,098,651.72

10 $1,098,651.72 $85,792.12 $70,000.00 $1,114,443.84

11 $1,114,443.84 $87,055.52 $70,000.00 $1,131,499.36

12 $1,131,499.36 $88,419.96 $70,000.00 $1,149,919.32

13 $1,149,919.32 $89,893.56 $70,000.00 $1,169,812.88

14 $1,169,812.88 $91,485.04 $70,000.00 $1,191,297.92

15 $1,191,297.92 $93,203.84 $70,000.00 $1,214,501.76

16 $1,214,501.76 $95,060.16 $70,000.00 $1,239,561.92

17 $1,239,561.92 $91,064.96 $70,000.00 $1,266,626.88

Summary $1,000,000.00 $1,456,626.88 $1,190,000.00 $1,266,626.88

Deferred Giving: Pooled Income Fund

A type of charitable “mutual” fund created from securities or cash donated by individuals, a family, or a corporation to a Non-Profit which is then invested to provide income for the Donor(s) during her/their lifetime(s). When a Donor dies, the deceased Donor’s share of the fund is available for use by the charitable organization.

How to Set Up a PGP

Form a Planned Giving Committee oVolunteers vs. Employees vs. Mix of Both

oEstate planning attorney is recommended for committee

Educate the members of that committee on the essentials of a PGP.

Create a “target list” of prospective Donors.

Planned Giving Committee

No ideal size but the more members of the Committee the easier it will be to implement a PGP.

Director of Development of Non-Profit should be on Committee. In a small Non-Profit, the President/CEO is frequently on the Committee.

A few Board members of the Non-Profit Board should be on the Committee.

Set the frequency of Committee meetings (encourage all members to show up in person to each meeting)

May be beneficial to hire a consultant with experience helping Non-Profits set up PGPs.

Gift Acceptance Policy

Develop a policy of what gifts you are willing to accept.

Temptation is to simply accept whatever comes but that can be a big mistake.

Some gifts may be more complicated to redeem than they are worth (i.e., bargain sale)

While a bargain sale is a great option for some Non-Profits, not all Non-Profits have the ability to partake.

A bargain sale is when a Donor proposes to sell an asset at a bargain price to a Non-Profit.

Types of Gifts to Consider

Cash

Tangible Personal Property

Securities

Real Estate

Remainder interests in Real Estate

Oil, Gas, and Mineral Interests

Bargain Sales

Life Insurance

Charitable Gift Annuities

Charitable Remainder/Lead Trusts

Retirement Plan Beneficiary Designations

Bequests

Life Insurance Beneficiary Designations

Gift Acceptance Committee

A subcommittee of the Planned Giving Committee.

Comprised of a few members of the Planned Giving Committee

The Gift Acceptance Committee sets the acceptance policy (what gifts will be accepted by the Non-Profit) and reviews and approves all gifts received by the Non-Profit.

Announce and Re-Announce

Announce your new PGP to your Donors/Supporters.

Include announcement in newsletter, if you have one.

Have PGP kick-off event and invite top Donors/Supporters.

Focus and Hustle!

Focus your efforts on your top Donors/Supporters (does not mean to ignore your other Donors/Supporters)

Be part of Donors’/Supporters’ lives – take them to lunch/dinner, invite them to cocktail hours, have President/CEO call them and write personal messages on any newsletters/mailings being sent to them.

Will not be successful overnight but, over the years, you will see the result (that’s the point!).

Brian R. Della Rocca, LL.M. (Taxation) Brian is a principal in the Kuwamura Della Rocca Law Group, P.A. (“KDR Law Group”), an estate planning boutique with offices in Silver Spring, Maryland and Rockville, Maryland.

Born and raised near Albany, New York, Brian has been practicing law since 2003.He earned his law degree from the Catholic University of America, Columbus School of Law. Brian also earned a Masters of Law (LL.M.) in Taxation and a Certificate in Employee Benefits from the Georgetown University Law Center. During his undergraduate years at the State University of New York, College at Oneonta, he was a member of the Tau Kappa Epsilon fraternity.

Brian is a frequent lecturer on estate and tax planning, including Estate Planning for Single Parents, the portability of the federal estate tax, the transfer for value rule, and, before the Maryland Register of Wills Association, on how to clear title to real property without the need to open multiple generations of estates. Brian has been quoted in Money Magazine and the Journal of Financial Planning on various estate planning topics.

Brian earned an AV Preeminent rating from Martindale Hubbell and has been named a “Rising Star” and a “Super Lawyer” by Super Lawyers Magazine for the District of Columbia in the field of Estate and Trust Law since 2013 and in Super Lawyers Magazine for the State of Maryland since 2009.

Brian currently serves on a committee for the Estate Planning Council of Montgomery County, Maryland. Brian is a former Co-Chair of the Maryland Estate and Gift Tax Study Group and a former Member of the Estates & Trusts Section Council for the Maryland State Bar. Additionally, is the former Co-Chair of the Montgomery/Prince George’s County Tax Study Group.

In his personal time, Brian just completed two terms as the President of the Lido Civic Club of Washington, DC, an Italian-American charitable organization formed over 85 years ago. He has been a member of the club since 2009.

Brian lives in Montgomery County, Maryland with his wife, two daughters, and a (male) dog.