Various Gifting Options for Charities


There are various gifting options for charities that a charitably-minded individual might consider.  Using a self-directed IRA or 401(k) plan to donate is not necessary, however, an individual may wish to establish a self-directed plan during the accumulation years of their plan to grow their retirement account with the freed0m and flexibility they may desire.  Also, it actually may be easier  to maximize their gifting with a self-directed plan as the individual may not have some of the restrictions that traditional IRA and 401(k) plans may impose.  For someone researching various gifting options for charities, the following strategies are a good sampling of options available.  It is not intended to be an all-inclusive listing of the various gifting options for charities, but it is a good working list.  We will identify the specific strategy and the benefits associated with the gifting strategy.

Various Gifting Options for Charities

The various gifting options for charities can be inclusive of the following:

Immediate Charitable Gift Annuities

Strategy — In this case, you transfer assets to the charity and the charity pays you (or up to two annuitants) a lifetime income annuity.  Upon cessation, the principal amount of gift passes to the charity.

Benefits — In addition to receiving an immediate income tax deduction for a portion of the gift, your annuity is backed by the assets of the charitable organization.  One should be careful; they want to make sure that while their gift is backed by the full faith and assets of the organization, does the organization have the financial resources to honor this strategy.  In a worst case scenario, the donor should consider their options if a charitable organization filed bankruptcy.

Deferred Charitable Gift Annuities

Strategy — You transfer assets to the charity (or up to two annuitants), however, the lifetime income annuity is delayed to commence paying at a future date.  Upon cessation, the principal amount of the gift passes to the charity.

Benefits — Because the annuity commencement is being delayed, this permits a higher annuity schedule and should result in a larger charitable deduction versus the immediate charitable gift annuity.  Through deferral you can say when you need and want the payments to start and, by deferring, you will receive a higher effective rate.

Charitable Remainder Trust Annuity

Strategy — You transfer assets into a trust.  The trust will make annual, fixed payments to you or your beneficiaries and, when the trust ceases, the remaining balance passes to the charity.

Benefits — You receive an immediate income tax deduction for a portion of the contribution into the trust.  If there are capital gains otherwise, you won’t have any upfront capital gains tax.  You realize a current benefit in fixed payments to you for the rest of your life or a set term amount of time.

Charitable Remainder Unitrust 

Strategy — You transfer assets into a trust.  The trust pays a percentage of the value of the assets to you annually and this value is re-calculated annually.  When the trust ceases, any remaining assets pass to the charity.

Benefits — You receive an immediate income tax deduction for a portion of the contribution into the trust.    If there are capital gains otherwise, you won’t have any upfront capital gains tax.  You receive income for a set period of time or life and the trust permits you to make additional contributions (and qualify for additional, potential tax deductions).

Real Estate

Strategy — You donate physical land (e.g., personal home, commercial building) to the charity and the charity will either use the property for their use OR sell the property and benefit from the sale.

Benefits — You receive an income tax deduction for the FMV (Fair Market Valuation) on the property.  There will be no capital gains tax on the donation.

Retained Life Estate Strategy

Strategy — Typically, you donate your principal residence to the charity with the agreement that you are able to reside at the residence for your life.  While you pay for all upkeep and taxes, the charity receives the residence after a term of time or upon your death.

Benefits — You will receive a gift tax credit and an immediate income tax deduction for a portion of the appraised, FMV of your  property.  You will continue to be able to reside in the property and realize an additional income tax deduction when you terminate the life estate.

Gifts of Retirement Assets Strategy

Strategy — You name the charity as beneficiary of your IRA or 401(k).  Upon your death, the charity receives the assets tax free.

Benefits — You are permitted to make such a donation free of income or estate taxes, whereas if you donated these to your heirs they would have taxable income.  You can establish such gifts in a revocable (preferred) or irrevocable manner and can, if you desire, continue to take distributions during your lifetime.

Life Income Gifts Strategy

Strategy — Through your will or revocable trust, you direct the entity to create a life income gift benefitting your heirs.  After the life income terminates the remaining balance is transferred to the charity.

Benefits — This arrangement can benefit both the charity and your heirs by achieving a charitable estate tax deduction which will lower the cost of providing for your heirs.  One significant benefit is that this gift arrangement is revocable to provide utmost flexibility.

Gifts of Tangible (non-real estate) Property

Strategy — Typically associated with fine art and collectibles, these gifts are transferred to a charity for their ultimate use.  They may display the art (example) or sell it.

Benefits — You receive a gift credit to the charity and an income tax deduction based on the appraised value of the donation.  There are certain IRS gift rules that must be met.

Gifts of Life Insurance

Strategy — There are many options available here.  You can donate a currently-existing policy that you no longer need for family purposes or take out a new policy specifically intended to benefit the charity.  If taking out a new policy, one wants to ensure they follow state insurability interests; however there are still avenues to maximize the gift.

If you donate a policy, it is important to note that some charities will not accept life insurance policies that are not fully paid up.  The reason being is that many charities (understandably so) do not want to serve as a “collector” to pay life insurance policies.

Benefits — As noted, you can donate a policy that you don’t necessarily need.  In addition, IF you make future contributions on the policy, those donated premium dollars can be used as future tax deductible contributions.  Finally, one can use modest means (premiums) to leave a legacy gift worth many times the amount of money (death benefit) later.

Charitable Lead Trust

Strategy — Unlike charitable annuities that pay you money during your lifetime, the Lead Trust accepts contributions of assets and makes installment payments to the charity.  Upon cessation of the trust, the remaining assets are paid to your heirs.

Benefits — All appreciation on the assets within the trust pass tax free to your heirs.  In addition, the value of the payments made to the charity reduces your estate tax.  You have the freedom and flexibility to schedule the payments for a set period of time, and potentially reduce the taxes owed later by heirs on the transfer of the remaining assets in the trust.

Gifts of Appreciated Securities

Strategy — During your lifetime, you may have realized e a significant appreciation of securities that, when taken, may result in significant capital gains taxes.  In choosing to avoid those capital gains taxes, you may elect to transfer the assets to the charity of your choice.

Benefits — With this strategy, you will receive a gift credit and an immediate income tax deduction for the FMV (Fair Market Value of the securities.  You receive an immediate income tax deduction and the charity may use your gift as they wish or you can designate the use of the funds received by the charity.

Charitable IRA

Strategy — With this strategy, you are benefitting a charity and your IRA at the same time.  You may elect to have your IRA loan funds to a charity with the charity using those funds as they see fit.  BUT to secure the loan, the charity promises a guaranteed rate of interest return payable to the IRA for the loan.  In many of these situations, the charity may elect to purchase a life insurance policy on your life.  They may use a portion of your gift to make the required interest payments, with the remaining funds being used to purchase the life insurance.  Upon death, the IRA would receive its original principal utilized for the loan (if not previously paid) so that the IRA has both its principal and interest paid and eligible to be paid to the IRA’s beneficiaries.

It is important to note that in this arrangement, a self-directed IRA would need to be established so that the IRA account owner has the flexibility to make this loan.  In your traditional IRA, you would not have the flexibility to make the loan.  Further, it is vital that this transaction is made as an investment from the IRA; as such, the account owner wants to ensure that there is sufficient security in the transaction so the IRA receives its full principal and interest from the charity.

Benefits — You have the ability to make a valid investment utilizing your IRA and, at the same time, benefitting charity.  The interest rate of return may be better than what the IRA may receive through traditional avenues (e.g., Certificates of Deposit).  Unlike some of the other charitable options, you are benefitting your charity while, at the same time, benefitting your IRA.

As noted, there are various gifting options for charities and this list is not intended to be an all-inclusive listing.  This information is intended to be educational and informative in nature.  It is not intended, nor should it be interpreted as, any form of tax, legal, financial or investment advice.  You must always consult with your respective professional in all such matters.