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Wednesday, May 1, 2024
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Case Studies |
A Planned Giving Solution for Baby Boomers
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Case:
With approximately 70 million baby boomers in the United States, it is quite likely that gift planners will encounter many donors who simply do not "fit" the gift planning profile. Typically, gift planners desire to "do business" with those donors who are more senior, e.g., donors who are 60 years of age or older. However, baby boomers range in age from the mid-thirties to the early fifties. With those younger ages, the period of deferral between the gift date and the time the gift actually comes to fruition (generally the date of death) is quite long. Therefore, planned gifts are, in most instances, not marketed to the large baby boomer population, but to the more senior generation.
The other problem that now exists with younger donors is that all charitable trusts created after July 28, 1997 are required to produce a minimum charitable income tax deduction (remainder interest) of at least 10% of the trust funding amount. Therefore, if a charitable remainder unitrust or annuity trust is funded with $1,000,000 worth of appreciated stock, the calculated tax deduction must be at least $100,000 to qualify as a charitable trust. This excludes some donors in their 20's and 30's from even creating a charitable trust because, even at the minimum 5% distribution percentage, the computed remainder interest is still less than 10%.
When a deferred gift such as a gift annuity or charitable trust is created for a younger donor, one of the primary concerns for the charity is the long deferral period before the gift actually comes to fruition. A 45-year-old, for example, has a life expectancy of 37.7 years according to Treasury tables. If a husband and wife are both 45-years-old, the joint life expectancy is over 44 years. It is difficult to get excited over a charitable trust, even a large trust, that will last for that number of years. When a gift is closed, the primary question asked by the charity's Executive Director is, "When can we spend it?" The key to a successful planned gift program with younger adults is to shrink the deferral period as much as possible and still respect the wishes and intent of the donor.
Question:
What is one option for the younger donors that not only will meet their needs, but also the funding needs of the charity? Does a deferred or planned gift mean that you have to wait a lifetime for the gift to "mature?"
Solution:
One alternative to the dilemma in working with younger donors is the pooled income fund. This type of planned giving vehicle does not receive much "press" and is actually not very popular among charitable institutions. There may be a number of reasons for this including the smaller size of the average gift, the longer life expectancy of the average donor, the time and expense of maintaining the fund or the lower interest rates paid to donor participants in the fund.
To make the pooled income fund a more viable planned giving alternative for the younger donor, the charity may modify the income distribution language to include the charity as one of the income beneficiaries. Under Reg. 1.642(c)-5(b)(2), a charity may be both the charitable remainderman and an income beneficiary of a pooled income fund as long as one other income beneficiary is a living person. Therefore, the distribution language of the pooled income fund could designate that 10% of the fund's income would be paid to the charity to be used for its charitable purposes and the remaining 90% of the income would be paid to the donor participants. The donor would not receive a current income tax deduction for the charity's 10% income stream. However, a thank-you letter to the donor each year for the income portion to charity is an excellent cultivation tool for future gifts.
The bottom line for this technique is that whether a donor is 35-years-old or 80-years-old, the charity receives current income from the fund based upon the fund balance. As the pooled income fund grows, so does the income to the charity. In one charity's case, this practice of distributing a portion of the income from the fund to the charity has resulted in that particular charity becoming the largest income beneficiary of its own fund. Also, a pooled income fund is not subject to the 10% minimum remainder interest requirement discussed above so any age donor is a candidate for the fund.
One final gifting option for a pooled income fund is the gift of an income interest. Assume that Maria, for example, was 45 years of age when she decided to make a $5,000 contribution to the charity's pooled income fund. Over the past five years, the fund has distributed to her an average return of 6%, or $300 per year. The charity has now run into a specific need for dollars and could ask Maria to donate her life interest in the fund which allows the charity to release the principal for immediate use. Maria would only be asked to give up $75 per quarter so that the charity could accomplish $5,000 worth of good with those funds. Maria receives an additional charitable income tax deduction and the charity is able to convert a future gift into a current gift.
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