Thou Shalt Not …

The Seven Commandments of Planned Giving highlight areas to avoid as we interact with donors and ask for planned gifts. By reviewing each commandment, you can develop a road map to assist you as you navigate through the perils of planned giving.

1. Thou shalt not ignore donors’ motivations, goals and financial situations.
It’s important to know more than cursory information about donors before creating and recommending an appropriate gift proposal. Since planned gifts are generated from matching donors’ passions and goals with what your organization has to offer, get to know your donors by building genuine relationships with them. Find out what’s important to them, what motivates them and how they’d like to put their charitable dollars to work.

In addition, you need to know your donors’ financial situations before recommending an appropriate charitable gift. For example, you shouldn’t recommend a charitable trust over a bequest if you don’t now about the donor’s assets and whether or not a trust is feasible given her desires coupled with her finances.

2. Thou shalt not make recommendations without adequate technical advice.
It’s important to know the legal tax implications of recommended gifts. Luckily, most major donors want to seek professional advice from a lawyer, CPA or some other type of financial advisor before agreeing to a large gift.

So bring your donors’ professional advisors into the loop early on in
the discussions. Have them counsel your donors on the tax effects of
their gifts and provide any needed legal advice. You don’t want to be held accountable for that; let the professionals do it. In addition, inviting the advisors to be involved will make them less likely to act as gatekeepers and oppose your proposal.

3. Thou shalt not recommend an inappropriate gift vehicle.
Not all gift vehicles are appropriate for certain assets. Depending on the type of asset your donor has under consideration, some vehicles work better than others. For example, the following assets and vehicles can be quite troublesome when paired together: real estate in a charitable remainder annuity trust; tangible personal property in a charitable remainder unitrust or annuity trust; mortgaged property in a charitable remainder unitrust or annuity trust.

As gift planners, it’s important for us to know what type of assets work best with certain gift vehicles. Then we can give solid recommendations to the donors and avoid giving them harmful advice.

4. Thou shalt not recommend the donation of inappropriate assets.
Some assets, although necessarily complex, are still appropriate for planned gifts; however, others are inappropriate in nearly every situation. Assets that can be unsuitable for lifetime gifts due to the tax problems they pose are IRAs, commercial annuities, savings bonds and qualified retirement plans.

Since IRAs and retirement plans typically are funded with pre-tax income, withdrawals are considered taxable income to the account owner. Further, with commercial annuities and savings bonds, any appreciation over the original cost basis is also considered taxable income when withdrawn or cashed.

Moreover, unlike gifts of appreciated securities where the long-term capital gain is avoided when given to charity, if these assets are used to fund a lifetime gift, the taxable event is unavoidable. When a donor uses these assets to make a lifetime charitable gift, he still pays income tax, even if the asset is given to charity.

The same theory holds true if the donor keeps these assets during her lifetime and gives them away after death. If the donor leaves these assets to heirs, the heirs must pay the income tax. Again, the taxable event cannot be avoided.

Charitable bequests of these same assets are more appealing. Leaving a savings bond, commercial annuity, IRA or retirement plan to charity at death avoids the taxable event as the nonprofit benefits from a zero- income tax bracket. The donor’s estate becomes eligible for an estate tax charitable deduction, reducing potential estate taxes more.

What about the donor’s heirs? With the stepped-up cost basis available on inherited assets such as real estate, estate planners say that when deciding which assets people should leave to heirs and which to leave to charity, real estate is better for heirs, while IRAs and savings bonds are better for charitable causes.

5. Thou shalt not recommend techniques that are ripe for IRS scrutiny.
Take care when dealing with techniques that aren’t IRS-approved charitable techniques. Being creative isn’t bad or wrong, but falling prey to “schemes” can be disastrous.

Most traditional life insurance gifts such as giving ownership of an existing policy to a charitable organization are legitimate planned gifts. But a recently promoted life insurance approach called “stranger-owned life insurance” is much different. A trust or someone with no relationship or giving history to the charity owns a policy or multiple policies on large donors. Many commentators argue that the arrangement violates insurable interest standards and public policy, which has attracted congressional attention.

6. Thou shalt not allow the tail to wag the dog.
Care should be taken to avoid outside influences from controlling the donor’s choices or from controlling the recommendations for a planned gift. To illustrate, a donor who establishes a charitable remainder trust in favor of your charitable organization might feel that the gift is made to benefit the nonprofit financially (albeit down the road as a remainder beneficiary), therefore the organization should pay the legal fees to establish it. The charitable organization, however, should not pay the fees for the donor’s trust documents, legal fees or fees for other professional advice. Payment of a donor’s fees by a nonprofit can risk the donor’s charitable deduction.

Also, an argument exists that the organization is giving the donor a private benefit because the charity will be using its own funds to pay for the personal debt of a donor. As a result, it’s in the donor’s best interest to have independent legal advice and to pay for that legal advice out of his or her own pocket.

7. Thou shalt not act as trustee unless qualified to do so.
Acting as trustee is a fiduciary duty sometimes not well understood by donors, advisors and nonprofits. Generally, most professional advisors (with the exception of skilled trust officers) aren’t well trained in the duties imposed on the trustee as a fiduciary. Moreover, these advisors typically are not trained to understand the legal terms used in trust documents and how to properly administer them. For many reasons, even attorneys are reluctant to serve as trustee because they know all too well the exposure involved when acting as a fiduciary. Further, not all states allow charitable organizations to act as trustee, so be careful when responding to a donor’s request to do so.

Johni Hays is an author and the senior planned-giving consultant for Des Moines, Iowa-based The Stelter Co., a national publisher of planned-giving newsletters and Web products for charities.