HOW TO ADD CHARITY
TO YOUR LEGACIES
This is the fourth of a four part series on estate planning.
USA edition
Frank D Minton PhD
1
HOW TO ADD CHARITY TO YOUR LEGACIES
A local newspaper carried a story about a high school history teacher who made a bequest of
$1 million to the local university that he attended. According to the reporter, people were
surprised that a public school teacher had been able to accumulate an estate large enough to
make a gift of this size, but the reporter explained in the article that the teacher had amassed his
small fortune by investing in rental real estate. Although his wealth came from his investments
rather than his salary, his passion was his teaching, and he credited three professors at the
university with arousing his interest in history and causing him to embark on a very satisfying
career. To honor those teachers and to help students who shared his love of history, he directed
that his gift be used to create an endowment, the income from which would provide scholarships
to history majors. He said this was a “payback” for the education he had received.
One day a food bank received in the mail a check for $25 accompanied by a handwritten note.
The author, a single mother of two children, explained that two years earlier she had lost her job,
had been evicted from her apartment because she could not pay the rent, and had exhausted her
food supplies. Someone told her about the food bank, and she swallowed her pride and went
there hoping to receive enough to feed herself and her children for a few more days. She did
receive food, but she also received a hug, assistance in finding emergency housing, and guidance
in finding employment. Now she was working and had a place to live. She concluded by saying
that, although she had little extra money, she did wanted at least to make a small contribution to
help others who might be struggling as she had two years earlier.
Most people have been beneficiaries of charitable organizations in the course of their lives. It
might have been the hospital where they or a family member was treated, the school that
launched them on a career, the church or synagogue where they worshipped, the zoo to which
they took their children, the symphony or opera that was a source of pleasure, or the nature
preserve where they hiked. Those who are able often leave legacies to such organizations as an
expression of gratitude for benefits received.
Other individuals leave legacies to charitable organizations, not because they received services
from them but because of the good work those organizations do in the community. For example,
2
most donors to food banks have never been to a food bank unless they volunteer at one. Most
donors to the Salvation Army have never been to one of its centers. Most donors to a shelter for
abused women have not experienced a dysfunctional family. Most donors to United Way will
never have occasion to use the services of many of the social service agencies that receive United
Way grants. Unlike the history teacher and the desperate woman who found her way to a food
bank, these donors have no sense of obligation for specific services that directly benefited them.
They feel a responsibility to share with others and build a healthy community simply because
they have been blessed with more than they need for themselves.
Many of these gifts are made during life, and they enable charitable organizations to carry on
their current work. Others are made at the end of life, and they sustain the missions of charities
well into the future. These are commonly called “legacy gifts.” They are the final expression of
the values of the donors.
Some individuals would like to make a legacy gift to a charity, but they hesitate because of the
financial situation of their heirs. This is understandable because family should always be the
priority in estate planning. However, there are others who have sufficient assets to provide
whatever might be needed by heirs and also leave legacies to charities. Or perhaps they would
consider a charitable legacy, if it could be done in a way that does not disinherit children and
other family members.
This booklet will be of particular interest to you if you are open to the possibility of a legacy gift
to one or more charities. It will address three practical questions:

Where will you make your legacy gifts?

What will be the purpose of those gifts?

How will you make them?
3
Where Will You Leave Your Legacy Gift?
A Public Charity
Legacy gifts are commonly made directly to a public charity such as a college or university,
religious body, health care institution, arts organization, etc. They are called “public” charities
because they derive a substantial amount of their support from the general public. If you have
been a regular supporter of a charity, such as your local church, and you would like to arrange a
gift to help it continue its service to the congregation and beyond, then your legacy gift should be
directed to it. If you would like to support the wider ministries of the NAB Conference, you can
make your gift to the NAB Foundation and specific any particular ministries you would like to
support.
A Private Foundation
Instead of leaving legacy gifts directly to public charities, some individuals like to create a
private foundation, which will make grants to public charities, and you, too, might be
considering one. A private foundation, like public charities, is tax-exempt under Internal
Revenue Code Section 501(c)(3), and it must be approved by the IRS as having a qualified
charitable purpose. Unlike a public charity, the contribution to a private foundation can come
from one donor, and it can be controlled by a governing board appointed by that donor. Indeed,
the primary reason to establish a private foundation is to retain control over investments, grantmaking decisions, and governance.
The price of such control is somewhat reduced tax benefits for gifts made during life and several
restrictions pertaining to allowable investments and transactions between the foundation and
disqualified persons, which include the donor, members of the donor’s family, and board
members. When you make a gift to a public charity during lifetime, the maximum deduction that
can be claimed in any one year is 50 percent of adjusted gross income in the case of a gift of cash
and 30 percent of adjusted gross income in case of appreciated property owned over a year. For
4
gifts to a private foundation, the limits are 30 percent and 20 percent respectively. When you
give appreciated property that you have owned more than one year (except for tangible personal
property unrelated to the charity’s purpose), you can deduct the full fair market value. However,
if you give property other than publicly-traded securities to a private foundation, your deduction
is limited to your cost basis. Although the income tax benefits for gifts to a public charity and a
private foundation can differ, the estate tax charitable deduction for end-of-life gifts is the same
for both no matter what assets are given.
In spite of somewhat reduced tax benefits, you might nevertheless decide to establish a private
foundation while you are living and perhaps increase its funding with a large bequest. Usually,
this is not a practical alternative unless the eventual funding will total several million dollars. In
additional to the initial establishment costs, there will be ongoing costs to the foundation for
investing, filing annual tax returns, accounting, and board meetings. In the event you do decide
to make your legacy gifts through a private foundation, you should determine the grant-making
priorities and whether the foundation will entertain proposals or initiate the grants.
A Donor Advised Fund
A gift arrangement that has some of the appeal of a private foundation without the tax and
administrative disadvantages is a donor advised fund. Community foundations have long invited
people to establish such funds with them, and that could be appropriate if you want to support a
variety of charities, religious and secular. We are pleased to report that it is now possible to
create a donor advised fund at the NAB Foundation, and you can recommend grants from it not
only for NAB entities, but also to other organizations that conduct similar work.
You could initiate the fund with a contribution during your lifetime, and you could augment it
with a bequest or other end-of-life gift. While you are living you and/or another designated
person would serve as advisor to the fund. The advisor would recommend that grants of various
amounts be made to particular charities. Although the final decision about recommended grants
must reside with the NAB Foundation, in actual practice the advisor’s wishes are almost always
5
followed. The only exception would be if the recommended recipient is not a qualified charity
or is engaged in an activity that the Foundation determines to be beyond the scope of its mission.
A donor advised fund is particularly appealing if, for tax purposes, you would like to make a
large contribution now but decide later about the charitable purposes. Many people use their
donor-advised fund to provide annual grants to the charities they want to support. If you
establish a donor advised fund with the NAB Foundation, you could seek advice from the
Foundation about the various ministries that are in need of support. You cannot control
investments in your fund as you could with private foundation assets, but you are relieved of
ongoing administrative duties. The foundation assesses a fee to your fund to cover its costs, but
you would incur no set-up costs.
You could appoint you children or other heirs as successor advisors to the fund, or you invite
them to participate in grant-making recommendations while you are alive. This is a great way to
involve them in the community and teach your values. When you are gone, the children might
confer with one another and reach a joint decision about organizations deserving grants, or they
might decide that each of them could suggest grants of his or her choice. In either case, the
donor-advised fund would be your legacy to the community and the legacy of community
responsibility you would have inculcated in your heirs. A donor-advised fund, like a private
foundation, can extend well into the future provided that grants are made from income.
What Will Be the Purpose of Your Legacy Gift?
If you establish a private foundation, you will probably empower future board members to make
grant-making decisions, subject to certain guidelines. Likewise, if you establish a donor-advised
fund, you will delegate to your successor advisor responsibility for recommending grants.
However, if you decide to leave your legacy directly to your local church, the NAB Foundation,
or another public charity, you can decide the future use of your gift.
6
Unrestricted Legacy
One possibility is to give the NAB Foundation the discretion to use your gift where it is most
needed when it becomes available. This is called an unrestricted legacy. Principal as well as
income could be expended, either in a short time frame for a particular project or over a longer
period for various purposes. In either case, the expenditures would be identified as coming from
your legacy gift.
Restricted Legacy
Another option is to designate your gift for a particular ministry but, as with the unrestricted
legacy, allow both principal and income to be expended. For example, a gift to the NAB
Foundation could be designated for foreign missions, church extension, or Christian education.
Your legacy would be the ongoing impact on whatever ministry was funded with the gift, and
expenditures would be associated with your name at the time they are made, unless you
requested anonymity.
Endowment
The most common type of legacy gift is for an endowment, which is an investment fund set aside
for the long-term support of a charity. The intention is that the fund be preserved over time and
that the income (normally defined as a percentage of the value of the fund) be expended for the
purpose designated by the donor. An endowment makes long-range planning possible because
of a predictable stream of income, and it protects the charity when other sources of revenue are
reduced.
Endowments have a long history. Oxford University began with an endowment gift from
William of Durham, and the Sorbonne from an endowment gift by Robert de Sorbonne. Most
colleges and universities and many health care, arts, social service, environmental, and religious
organizations have endowments. The NAB Foundation is among those that have established
7
endowments and that allow a donor to establish an individually-named endowment for a
particular purpose.
Usually an endowment bears the name of the donor(s), but sometimes donors name their
endowments for a spouse or significant other, parents, grandparents, or someone else they wish
to honor. The annual distributions are identified as coming from the named endowment, and
thereby the memory of person or family for whom it is named is preserved in perpetuity. It is
common practice for the beneficiaries of the endowment distribution to report to the donor or the
donor’s heirs. One couple, who had established an endowed scholarship named for a deceased
daughter, said that they had derived great satisfaction from corresponding with scholarship
winners and tracking their careers. There could be a similar contact with a missionary whose
work is funded in whole or in part with distributions from an endowment. You may, of course,
contribute for the general NAB Foundation endowment anonymously without establishing a
named fund.
The minimum contribution for a named endowment depends on the purpose. If there are
relatively few restrictions on uses of endowment income, the minimum will be much lower than
if the endowment is to fund a particular project or position. The NAB Foundation can provide
you with a menu of the kinds of named endowments you might establish and the minimum
amount for each. We can also prepare for you an endowment agreement that would become
operative when your gift is received.
A Building Name
Another way that a legacy gift is memorialized is by naming a building or section of a building
for donors or someone they wish to honor. College and university campuses, in particular, have
many such named buildings. While many of these are named in recognition of lifetime gifts,
they can also be named upon receipt of an estate gift, or even before the estate gift is received, if
there is a pledge to make it. The amounts for a building legacy gift depend on many factors,
including the facility and its cost, and these naming gifts are typically negotiated between the
8
donor and the charity. Naming all or a portion of a building is less common for religious
organizations than for universities.
How Will You Make Your Legacy Gift
After you have decided where to make your legacy gifts and what will be the purpose of those
gifts, you will want to determine how to make them. During your lifetime you have no doubt
make numerous current charitable gifts, usually with cash, but perhaps also with property such as
securities or real estate. This section concerns the various ways you could make a legacy gift,
understanding it to be an ultimate gift, one that expresses your values, is made possible by your
life’s work, and that would likely be realized by the charity in the future.
Revocable Gifts
You might be willing to arrange a future legacy gift if you can retain possession of your assets or
revoke the gift if family circumstances change. Below are some ways of doing this:
Include a charitable bequest in your will (or a beneficiary provision in a living trust). If you
already have a will, you may simply add a codicil (amendment) to that will without going to the
expense of having a new will drafted. Likewise, you can add an amendment to a living trust.
A gift to charity by bequest or a provision in your living trust qualifies for a federal estate tax
charitable deduction (and also a state estate tax deduction in certain states that have a state estate
tax). If your estate is large enough to be subject to that tax, a charitable bequest will reduce the
estate tax that will be owed.
A charitable bequest could be any of the following:

A pecuniary bequest where the charity is given a specific dollar amount.
9

A specific bequest where the charity is given particular assets such as named shares, a
parcel of real estate, an art object, etc.

A residual bequest where the charity is to receive all or a certain percentage of your estate
after debts, taxes, and other expenses have been paid and pecuniary and specific bequests
have been made to named beneficiaries.

A contingent bequest where the gift takes place only under certain circumstances, such as
not being survived by a spouse.
Name the charity as beneficiary of a life insurance policy. The procedure is to request a
change-of-beneficiary form from the life insurance company and indicate on the form what
portion (all or a percentage) of the proceeds are payable to the charity. If it appears in the future
that family would need all of the proceeds from this policy, the beneficiary can be changed
again.
Proceeds from a policy owned by an individual are included in that person’s estate, but proceeds
paid to the charity qualify for an estate tax charitable deduction. Again, for larger estates, the
estate tax savings can be quite significant. If you would like a current income tax charitable
deduction, you could make the charity owner of the policy. That would make the gift
irrevocable, and you could no longer change the beneficiary or access the cash value.
Name the charity as a beneficiary of an IRA, 401(k), 403(b), or other retirement plan. This
is probably the most tax-advantaged of all gifts a person can make. The reason is that retirement
plan assets given to charity are subject neither to income nor estate tax. If individuals are named
as beneficiaries of these funds, distributions definitely will be subject to income tax, and if your
estate is over a certain size and anyone other than a spouse is named as beneficiary, the
retirement funds will also be subject to federal estate tax (and also to state estate tax if your
primary residence is in a state with such a tax).
The procedure is similar to that for a life insurance policy described above. Simply request a
change-of-beneficiary form from the plan administrator and indicate on it the percentage of the
remaining assets the charity is to receive.
10
Gifts That Pay You Income
Some gifts actually “return the favor” by combining a charitable gift with life payments to you
and/or other beneficiaries you designate. It is often possible even to increase your income in the
process of making a gift.
One type of income gift is the charitable remainder trust. This kind of trust pays income for
life or a term of years. The payments could be made to you alone, to you and a spouse jointly
and then to the survivor, to you first and then to someone else, or to other persons from the
outset. If you are to be a beneficiary you would establish the trust during your lifetime, but you
could also establish the trust under your will to provide income to heirs.
If you prefer payments of a fixed dollar amount, you would choose a charitable remainder
annuity trust. If you are willing to accept variable payments that depend on the investment
performance of the trust, you would choose a charitable remainder unitrust. With the latter you
could elect to have the trust pay the lesser of net income or a percentage amount until a certain
event (such as the sale of donated real estate) occurs and then have it pay the percentage amount.
When the trust terminates, the remaining capital would be used for the charitable purpose you
have designated.
Both types of charitable remainder trusts offer these tax benefits:

An income tax charitable deduction for a portion of the amount you transfer, if you fund
the trust during your lifetime.

In the case of trust established during your lifetime with appreciated property, no tax on
the capital gain when you transfer the property or when the trust sells it. (A portion of the
payments would be taxed as capital gain.)

Gift and estate tax charitable deduction. If you, or you and a spouse, are the only income
beneficiaries, none of the trust assets will be subject to gift or estate tax.
11
Another gift that makes payments for life, which is offered by some but not all charities, is the
gift annuity. The NAB Conference is one that issues gift annuities. In exchange for cash or
other property, the Conference agrees to pay a fixed sum of money for the lifetime of one or two
persons. These payments are backed by the total assets of the organization. At the end death of
the sole or surviving beneficiary, the remaining portion of the contribution is used for the
purpose the donor has designated. A gift annuity, like a charitable remainder trust, can be
established during your lifetime if you want payments for yourself, or it can be established at the
end of your life to provide for heirs.
The size of the annuity payments depends on the age(s) of the beneficiary(ies) at the time the
annuity is created. The older the beneficiaries, the larger the payments will be. Most charities,
(the NAB Conference included) that offer gift annuities follow the rates recommended by a
national organization established for this purpose.
Though calculated differently, the tax benefits of a gift annuity are similar to those of a
charitable remainder trust. There is an income tax deduction if you establish the annuity during
your life, avoidance of some and possible deferral of the rest of the tax on capital gain when
appreciated property is contributed, and a gift or estate tax charitable deduction, depending on
whether the annuity is funded during or at the end of life.
A Gift You Can Live In
If you would like to make a legacy gift with your primary residence or a vacation home, you
could transfer title to the property now, but retain the right to use it for the rest of your life or for
a period of time. You would receive a substantial income tax charitable deduction that could
reduce the amount of tax you pay over the next several years, and realize these savings without
altering your lifestyle.
In the event that declining health or other circumstances necessitated your moving, you could
rent the house and collect the rents, you and the charity could agree to sell the house and divide
the proceeds according to the value of your respective interests, or you could give your life
12
interest and receive another deduction. At the end of your life, the NAB Foundation would sell
the property and use the proceeds for the purpose you directed.
Gifts That Also Provide for Heirs
Sometimes parents are in a dilemma. They want to make gifts to charities that embody their
values and improve the quality of life, but they don’t want to do this at the expense of their
children. They wonder how to be charitable without diminishing the children’s inheritance.
Another question is the form of the legacies to heirs. For some children who are good managers,
a lump sum bequest may be entirely appropriate. However, it may be more prudent to give
improvident children a stream of income rather than a lump sum. There might also be a child
with a disability, who has special needs. Fortunately, there are charitable plans that enable a
person simultaneously to meet the particular needs of heirs while leaving an enduring legacy for
the causes you embrace.
One of these is the charitable remainder trust discussed above. If you have an improvident adult
child, you might consider naming that child as beneficiary of such a trust. If you have a special
needs child, you could have a charitable remainder trust make distributions to a special needs
trust, the trustee of which, in his or her discretion, would make distributions for the needs of the
child other than basic care, which may be provided through a governmental program. Perhaps
your children are neither improvident nor have special needs, and you are willing to arrange a
charitable legacy with whatever might remain after attending to their security. In that case, you
could establish a charitable remainder trust with income first to you and a spouse and then to the
children for their lives, or you might, under your will, create a charitable remainder trust that
pays income to the children and then distributes the remainder for the family legacy.
A plan that makes sense for high-net-worth individuals who would like to transfer significant
wealth to children or grandchildren while minimizing gift and estate taxes is the charitable lead
trust. It is the reverse of a charitable remainder trust in that it first pays income to charity and
then distributes the principal to your heirs. Usually, the payments are a fixed amount, and the
trust lasts for a certain number of years. If your children or grandchildren are relatively young,
13
you may prefer that they not receive a substantial sum until they have completed their education
and embarked on a career, in which case the trust could last until they have reached that stage of
life.
Like a charitable remainder trust, a lead trust can be established during your life or under your
will. The present value of the payments to charity qualifies for a gift or estate tax deduction,
depending on when the trust is created. When the interest rate the IRS prescribes for
determining the deduction is quite low, as it has been the last few years, the deduction is
extraordinary large.
The annual payments to the charity could be used for whatever purpose you wish. They could,
for instance, pour into a named endowed fund. They might also be made to a private foundation
of a donor advised fund. If they go to a donor advised fund you, or perhaps you and family
members acting together, could decide year by year where to recommend the grants. Thereby,
the lead trust becomes a means of teaching community responsibility and instilling your values.
Assistance with Your Charitable Legacies
We are available to talk to you about legacy gifts in general -- choosing a purpose that will add
meaning to your life and designing your gift in a way that maximizes the financial benefits and is
mindful of your family. Another service we provide is financial illustrations tailored to our
situation for the plans discussed above, which you could discuss with your legal and financial
advisors.
We hope this booklet has been helpful as you consider the where, what, and how of charitable
legacies, and we thank you for your interest in the materials provided through our special fourpart estate planning series.
“What we have done for ourselves alone dies with us;
what we have done for others and the world remains and is immortal.”
Albert Pike
14
About the author
Frank Minton is a Gift Planning Consultant for the North American
Baptist Foundation.
He holds MA and PhD degrees from the University of Chicago and is
the owner of Frank Minton Consulting LLC. located in the Seattle
suburb of Lake Forest Park, Washington.
He is the principal author of Charitable Gift Annuities: The Complete Resource Manual
and is co-author of Planned Giving for Canadians. Frank is a member of the American
Council on Gift Annuities, the Partnership for Philanthropic Planning, the Estate
Planning Council of Seattle, and the Washington Planned Giving Council.
NAB Foundation - 444 E. Roosevelt Rd., #335 - Lombard, IL 60148
Phone (630) 613-9365 www.NABFoundation.org
15