Episode 55: Planned Giving Part 2 - Bequests and CGAs; Making it Easy

Welcome to another edition of “Around with Randall”, your weekly podcast making your non-profit more effective for your community, and here is your host, the CEO and Founder of Hallett Philanthropy, Randall Hallett.

It’s another terrific day here on “Around with Randall”. Today's conversation is part two of our look at planned giving, and in the first part we talked about kind of the bigger picture of planned giving and why it's important. And we really discussed possibly four major challenges and these three episodes that follow that initial one are really going to try to demystify those challenges and create some opportunity for you in your nonprofit. Today is talking about bequests and gift annuities and we'll talk about the reasons why, and why they're probably the most important ones to think about right now. These are dealing with the concerns that come from what I called in the previous podcast 1a and 1b. That well, this is the law so I’m not a lawyer I shouldn't talk about it, or I don't I shouldn't know much about it. Or number two, that it's overly complicated and what i'm hoping by the end of this 15 minutes or so is we're going to take those and knock those down a little bit and make you feel a little bit more comfortable. 

So let's start with bequests. Let me tell you why I start with that. Seventy-five-to-80 percent of all planned gifts come in the form of some bequest to the nonprofit. By far and away the most discussed and executed estate plan gift opportunity that there is. And so let's start at the top. What is a bequest? All that is, is language in a will or a trust that says the nonprofit should get something specific after passing, not during life, that something's going to happen to that nonprofit.

This is really important because when we talk about return on investment, which we've done numerous times in the various podcasts of “Around with Randall”. When we look at the research done by the Association for Healthcare Philanthropy, what we find is is that the top producers - that top 20 - when they turn in their data and the data sifted through, that a major gift for a high performer is $137,000. And even if it's maybe just all of the submissions in health care philanthropy it's $105,000. Yet if we look at a planned gift with 80-to-85 percent being some type of bequest, the high performers show that the average gift is just over $457,000. And so we want to illuminate plan giving options because it's a better ROI, creates a better opportunity for us to maximize the giving potential of any person or couple or family that we work with. So the bequests are the largest part of that and it's just really somebody saying i want to leave something to my favorite charity or this particular non-profit. 

And there are four kinds of bequests, and again this is not complicated. There is the specific request that says “I’m going to leave the charity artwork,” and the complication here is is that when that will is read or the trust is released and that artwork doesn't exist inside the estate, well that means that beneficiary doesn't get it because it’s… there's nothing there to satisfy it. There's the general bequest which says “I’m going to give -  I want to give $10,000 or $25,000 to my favorite charity,” it doesn't say where that money comes from and what the estate does is figure out okay we have to sell some things and when we do that we will give that charity that general bequest of $25,000.

There's something called a demonstrative bequest which is a gift of something specific from a named fund or account. So it may say something like “I’m going to give the charity everything in my checking account,” and if there's nothing in the checking account then obviously there's no money to be transferred. But it's just a very specific thing. The fourth is a residuary bequest which is really just whatever's left goes to the particular beneficiary, in this case hopefully a nonprofit. 

So, it's just four kinds of requests. Pretty simple. There's the specific. I’m going to give them exactly this. There is the general - I want to give them some amount of money and the estate will figure out how to pay them. There is the demonstrative -  i'm going to give them something from a very specific place inside the account, inside the estate, excuse me. And there's the residuary - that's like everything that's left, I mentioned in the first podcast in this four-part series on planned giving. Some conversations around what happens, even if you have, like myself, younger children, and you are wanting to make sure that you take care of them as a father or if spouse they come first. But there's this idea of where charities might fit in, and I gave the example, it's not meant to be sad. Knock on wood it doesn't happen, but if all four of us go, that in terms of death, that money, that estate which would be larger with life insurance and other things that come, have to go, has to go somewhere. 

And so there's this concept of inside bequests as well as other places, but primarily, bequests in terms of beneficiaries - those who receive primary, secondary, tertiary, quaternary - and the idea is just as the word sound. Primary, they are the first to take, secondary if the primaries aren't there then the second level beneficiaries take effect, and even in our case if all four of us pass more than half of our estate would be given to charity. And, here's why this is important. So even if you're dealing with a family or a person who has a family, and they're like, “I’m not putting you in our estate, my money's going to go to the kids if something sure should happen,” by just getting into the conversation about becoming a tertiary or quaternary beneficiary after - or if there were no other beneficiaries, no children - others like that what we know is is that 69 percent of people will change their will in their lifetime. But 20 only 25 percent will change the gifts, the beneficiaries, in their will. And I mentioned this previously. If you are mentioned in someone's estate plan, even if you come after a spouse and children, that idea of layering primary, secondary, tertiary, quaternary, the likelihood that you'll be removed is very low. And here's another crazy stat about the bequests. In the fourth episode we'll talk about marketing right, so important. This is one of those statistics. Did you know that 34 percent of the bequests never had direct interaction financially, charitably, with their nonprofit they've been tracking, following you or like what you do for many years. It's staggering to think about the fact that we could have people who make gifts, who never maybe made a gift. We also know some great work by Stelter, who's a planned giving company, that tells us that the most likely bequest owners are ones that give you the smallest gifts but are consistent. So there's a lot of this idea of bequest and it's so easy to include your nonprofit. All they need to do is say “I’m going to leave this to our nonprofit, to this nonprofit, this charity, EIN number,” and then the number that identifies your charity. Make sure it's very clear so there's no consternation after the fact, or if something, if there's no other beneficiary alive, “I’m leaving it all to this charity, or a good percentage of this charity, EIN number, employee identification number, federal number, that your your charity has. 

The bequests are so easy to execute. They don't change anybody's financial future, and most importantly, it takes no dollars in cost during the donor's lifetime to make that gift come to fruition, and everybody's money has to go somewhere. There's only three places it can go - to an individual, usually a loved one, to the government through taxes, which nobody's really interested in, or to a nonprofit. The bequest 80-to-75-to-80 percent of all planned gifts come from that.

The other one I want to tackle today is this idea of a charitable gift annuity, a CGA. And it's really important, particularly what I think is going to happen economically over the next probably four-to-six years, in particular, with what's going on and how Covid is affecting the economy of of the United States and others.So let's start with what a CGA - a charitable gift annuity -  is. Keep it very simple, is the CGA is just a contract where a donor gives the charity X amount of dollars, and we'll go through some of the details, and in return for that those dollars over the lifetime of that individual or a couple. So one or two life, as they call it. So one life could be this the wife and second wife could second be the husband, whoever is the longest living. We will pay you either monthly, quarterly, or annually a percentage of what that amount that you gave us. What. So let's say it's a $100,000 might give you a five point, five percent, $5,500 dollars a year to be used and here's the crazy thing okay so you might be thinking okay so what do we need to know. The first thing you need to know is the the rates, so that return, that 5.5 percent that I mentioned is set nationally. The great thing about charitable gift annuities is there's no competition like they could offer more than I do, or or that we could, that's all set by national standards, by a governing board, so another charity can't offer more, and it's based on the age. So you just have to get the percentages and you can kind of walk people through it. There's a couple pieces of key information you'll need with a CGA to build out the illustration, as it's called. If they give x we can give you this back, is number one. You need the age, or ages, of the individuals who you will be entering into this contract. By the way, don't forget you're going to take that $100,0000 and invest. The hope is is that you have to pay 5.5 percent, you invest it and get six percent. You're even making more money and when they die, I probably should have said this originally, the charity gets to keep whatever's left, if there's more than $100,000 they get that. If there's less than a $100,000 they get that. You need a couple key pieces of information. Number one, you need the ages, birth dates of the of the people, probably good to get their general idea of their tax bracket because they're going to get some money back every month, quarter, year of that $100,000. Let's use that as the base example. And you have to find out how they want to be paid, monthly, quarterly, annually. The least you have to pay them the better. You are in nonprofit. Because someone has to manage that. Why would people do a CGA? Well, let me tell you why. This is really important in today's economic world. Over the last three years we've seen a dramatic increase in the stock market, which people with resources have enjoyed, but over the last couple of months there's been a stagnation of stock market growth, and it's harder to get a higher return on investment. People live on that investment. This is what's considered like a fixed income type opportunity, meaning if someone gives you that $100,000 you're going to pay them 5.5 percent, they are guaranteed to get that $5,500 every year -  it's baked into the contract. So, people who may not be seeing the same amount of return that they got over the last few years and are skeptical or concerned about not seeing increases in their portfolios may look at a charitable gift annuity as a way to guarantee income in a way they're not able to normally do so, and you take on, as the charity, the risk of that $100,000, trying to invest it wisely to make maybe just a little bit more than you have to pay. Here's another reason that a CGA is really important. When they give you that $100,000, depending on their age or ages, they get an immediate tax deduction. It’s not 100 percent so if we use that 5.5 percent return and a $100,000 ballpark figure they may get a $40-$45,000 immediate charitable deduction that, depending on the state and some other factors, that they can take for the next seven years. They use it all at once or a little bit every year, however they want to do, it but the other interesting thing is remember that $5,500 the charity would pay them based on the $100,000 that they entered into the contract with, that you'll keep after they pass, a certain percentage of that is tax free as well. So in our example we had the $100,000 it might be that as much as 60-70-80 percent of that $5,500 may be tax-free, and that for a retiree is enormous. So let's start over, making it simple CGA. They give you money. You're going to enter into a contract. Depending on their ages those rates are preset -  easy to find. You pay them every month, quarter, or year, or annually that percentage of the amount that they put in. Well, our example is $100,000, 5.5 percent, and when they pass you get whatever is left. If you can invest it wisely, make more, great. They get an immediate tax deduction of a certain percentage and that annual distribution, that you're going to be paying them a portion of, that is also tax-free. The reason why this is going to become important, I’m seeing this with clients, is again because people are afraid the stock market's not going to continue to grow, their investments won't grow, and they may depend on distributions or that growth for living and this locks in payments guaranteed for people for as long as they live. CGAs, in down economic times or stagnant economic times, are highly advantageous for both the nonprofit and the donor. It's incredibly important that you become more aware of this, and much like the bequest, may seem more complicated but it's really not. It's an easy way to have someone feel good about a standard income and provide a charitable gift with immense tax benefits, all in one.

 So today, bequests and charitable gift annuities, trying to keep it simple make you feel better. We'll take on trusts next, which always scares the dickens out of people, and I’m like it's actually very simple. We'll get into that next time. Don't forget to check out the website that's hallettphilanthropy.com. Blogs being posted all the time -  two or three a week - about our profession, different things going on, different things to consider in terms of leadership and certainly if you have any comments or thoughts email me at hallettphilanthropy.com. First with podcast if you have a subject matter you'd like covered or if you think I did something that was - just you just totally disagree with that's reeks r-e-e-k-s at hallettphilanthropy.com. Planned giving part two. It's important because what we do is so valuable to help others making the world a better place. That's the definition of philanthropy, love of mankind, love of humankind. Don't forget my all-time favorite saying, “some people make things happen, some people watch things happen, then there are those who wondered what happened.”

If you're in this industry you're someone who's trying to make something happen for your community, with people who are wondering what happened, and that's valuable, important, and meaningful, and I hope you know that today and every day because that's what makes the nonprofit world, philanthropy, so awesome to work in. We'll see you next time on part three of planned giving, dealing with trusts. And I can't thank you enough for joining me right here on “Around with Randall.” Don't forget, make it a great day.