In recent years, the term “blended gift” has increasingly been used to refer to various ways individuals can make significant charitable gifts. I first used this term at a philanthropic gift planning conference in 1995.1
As the focal point of my presentation entitled, “How Will The Baby Boomers Boom?” I noted that the first Baby Boomers were approaching the age range of 55 and older, when most significant charitable gifts are planned and implemented. Given that Baby Boomers married later, were facing unprecedented periods of retirement and were, in many cases, responsible for the economic well being of aging parents, I predicted that this generation would be more inclined to make larger charitable gifts differently from previous generations and would use what I referred to as “blended gifts” to do so.
Let’s explore some of the many ways to structure blended gifts that provide both near term and future benefits for charitable recipients, while also serving as a welcome component of plans to help ensure the personal long-term financial security of a client and/or loved ones. Careful planning can maximize and accelerate income, gift and estate tax savings.
The term “blended gift” was originally meant to describe the new and different ways that Baby Boomers and other seniors might be expected to make gifts. Industry experts predicted that their gifts would be comprised of a number of varieties. Some gifts would be outright immediate transfers of cash and other assets, while others would be deferred for a number of years or until the death of one or more individuals. Other gifts would be structured as combinations of current and deferred gifts, with the focus on the total value of the gift.
In subsequent years, the term “blended gift” was conflated in some quarters to describe a simple combination of an outright, immediate gift and a commitment to make a future gift through a will, trust or other revocable estate-planning vehicle.
It’s not uncommon to find these combinations of current and deferred gifts being valued in their totality and counted toward increasingly ambitious fundraising campaigns.
In the early 2000s, the term “comprehensive campaign” emerged to describe campaigns that were no longer devoted to the traditional purpose of funding capital projects.
These campaigns were increasingly designed to raise a combination of funds to be devoted to current operations, used to fund capital projects or to create endowments that were funded immediately or through irrevocable deferred gifts and bequest expectancies. As a result, goals ballooned over time from relatively modest sums in the millions of dollars to increasingly common goals of $1 billion or more. This ballooning occurred despite the fact that many of the gift commitments from relatively younger donors wouldn’t produce usable funds for decades.2
Basic Blended Gift
As noted above, the most common blended gift a client may be asked to consider is an outright gift of a smaller amount combined with a relatively larger testamentary gift. The primary reasons for this type of gift is that it appears simple on its face, and little training is required to prepare staff and volunteers to ask for it.
The tax benefits of a basic blended gift are also straightforward. The donor will, in many cases, benefit from a charitable income tax deduction for the amount of the outright component of the gift. In the majority of cases, the estate gift will, however, result in little or no federal estate tax savings given today’s $5.45 million federal estate tax threshold ($11.9 million for couples). According to the most recent Treasury Department reports, 99.5 percent of those who passed away in 2014 didn’t die with sufficient assets to require the filing of a federal estate tax return.3
While this approach can result in larger gifts than might otherwise be received, there may be more effective ways to structure gifts that provide greater benefits for both the client and the philanthropic beneficiary.
A Better Alternative?
Consider another way to structure a blended gift that features multiple financial benefits for all parties concerned. Let’s assume that William and Susan, both age 60, have been asked to make a $1 million gift to a campaign. The pledge period is six years, but there are indications that this period may be flexible, especially in the case of larger gifts.
They own securities worth $2 million with a cost basis of $500,000. The stock pays no dividends. They’ve considered making an outright gift of $1 million worth of the stock, but are concerned that one or both of them may need access to these funds to help maintain their economic security later in life.
They learn the campaign offers credit for bequests via wills and other revocable testamentary gifts for those age 60 and older. Such gifts are credited at present value based on the life expectancy of the donor(s) using a discount rate of 4 percent.
After considerable reflection, William and Susan offer to make a $1 million blended gift. The current portion of the gift is an outright gift of $250,000 of the stock. In addition, they commit to a $750,000 bequest at the survivor’s death.
They’re surprised to learn that they’ll only be credited as making a $400,000 gift. This sum is the total of the $250,000 outright gift and the $150,000 present value of the bequest based on their joint life expectancy of some 30 years.
One of their advisors suggests they consider another option involving the creation of a charitable remainder unitrust (CRUT) that will pay them 5 percent of the value of the trust corpus each year for the remainder of both of their lives.
If they fund the trust with the $2 million in securities, their asset manager can diversify the holdings inside the tax-exempt CRUT without incurring capital gains tax in the year of the gift. While in this example, the donors used appreciated securities, it can also be wise to consider the use of other appreciated assets, such as art or real estate, to fund a flip CRUT. These assets provide the same benefits as appreciated securities, while providing a tax-favored means of diversification and reducing the burden of management of real and personal property in later years.
William and Susan will be entitled to an immediate charitable deduction of $548,000 that can be used to eliminate tax on that amount of income over a period of time. Their accountant estimates they can deduct approximately $95,000 this year and in each of the next five tax years so they can make use of the total deduction within the permissible 5-year carryforward period.
When the charity learned the details of this gift, it was understandably reluctant to credit the gift as a $2 million gift to the campaign. The charity offered to credit the gift at $616,000 using its 4 percent discount rate and William and Susan’s 30-year joint life expectancy.
This wasn’t the complete structure of the blended gift, however. At the time they fund the trust, William and Susan will also execute a pledge agreement in the amount of $1 million to be completed over a 10-year time frame, partially or fully relying on the income stream from the trust to make the payments each year.
Recall the donors aren’t currently receiving any income from the securities, so their immediate cash flow isn’t affected when they use them to fund the trust. They’re comfortable with this result as they’re still in their peak earning years and now need no additional income. They plan to begin taking significant retirement plan withdrawals in 10 years when they reach the age of 70.
Assuming credit is given for the full value of the payments made during the campaign, and the remaining four payments are credited at present value, the total value of the payments for campaign purposes is $886,000.
The present value of the anticipated CRUT remainder ($616,000) combined with the present value of the pledge payments is just over $1.5 million, and William and Susan are pleased to be credited with a gift of this amount in the campaign.
The assets in the trust can grow tax free over the remainder of their lifetime. They anticipate they’ll enjoy over $150,000 in tax savings from their income tax deduction, in addition to bypassing the estimated $300,000 that would have been due in capital gains tax if they’d sold the securities and diversified their investment outside the trust.
After the $1 million pledge has been satisfied around the time they plan to fully retire at age 70, they’ll enjoy additional income of $100,000 per year or whatever amount the trust may be providing at that point for the remainder of their lifetimes.
The charity sees its short-term benefit increase from an immediate gift of just $250,000 to $1 million to be received over an estimated 10 years. In the third year, the charity’s cash flow will exceed the original offer. Instead of the possibility of a bequest of $750,000 in an estimated 30 years, the charity will now receive $2 million, or whatever other amount remains in the CRUT, at the death of the survivor.
The definitive time frame of the trust gives the asset manager the flexibility to pursue investment strategies designed to result in growth over the long term while providing tax-favored income to the donors under the tier structure of income reporting from the CRUT.4
Further, when the next campaign is inevitably conducted, the charity has the option of asking the donors to continue to divert all or part of their annual payments to fund a new pledge or perhaps suggesting they sever a portion of the trust corpus to fund an additional gift in the event the trust has experienced more growth than anticipated.
Til Death Do Us Part
The above example is just one of many ways to structure gifts from younger individuals in a manner that results in substantial benefits to all parties to the gift. But, what about the situation in which a client who’s well into his retirement years is asked to consider a sizeable gift commitment?
Unless he’s of extraordinary wealth, it’s unlikely in today’s environment that he’ll make substantial outright gift commitments. Increasingly, donors decide to make these gifts as part of a comprehensive estate plan designed to assure that they and possibly a survivor are financially secure for the remainder of their lifetimes. That can be an extended period of time. Recent Internal Revenue Service reports indicate that 84 percent of individuals who die with taxable estates die beyond the age of 70, 64 percent die after age 80 and over 25 percent die in their 90s.5
In such cases, it’s not unusual for a donor to forego making a large outright gift and instead make a sizeable bequest commitment. A charity may announce such a gift at full value with no discount for donors beyond a certain age, often as young as age 70. The charity rarely, however, discloses the nature of the gift. At the donor’s death, it’s not unusual for press reports to announce the gift again, often years after the initial gift announcement. Over time, these double announcements can lead to an inflated impression of the economic condition of a charity.
Fortunately, some charitable recipients have determined how another type of blended gift can begin with a bequest. In many instances in which a bequest is being considered, the donor may have more than sufficient income to meet current needs, but she wishes to conserve capital for medical expenses and other potential needs in the future. In that case, it may be possible to announce an endowment that begins functioning prior to the donor’s death.
Take the case of Marianne, age 80. She’s indicated that she would like to create an endowment fund in memory of her husband. She’s provided for a $1 million bequest through her will and executed a pledge agreement that’s intended to be a binding commitment of her estate.
The charity doesn’t typically announce the creation of endowment funds until the donor dies. In Marianne’s case, however, an agreement is reached whereby she agrees to make a gift each year in an amount equal to the spend rate of the charity’s endowment, typically 4 percent. These gifts are used to fund current needs of the charity, and these amounts don’t reduce the amount of the bequest at her death. This type of gift is also sometimes referred to as a “virtual endowment.”6
Marianne is required to take a mandatory withdrawal from her individual retirement account, and she uses this amount to fund the annual spend rate. The amount of the donation is enough to offset the taxes that would otherwise be due on the withdrawal. The balance of the IRA will be left to the charity to fund the bequest at her passing. She’ll leave her family other funds that wouldn’t be considered income in respect of a decedent and taxable to them on receipt, as would be the case with the balance of the IRA if left to them.
Making It Possible
The concept of blended gifts holds great promise for charities planning to meet increasing demands for the services they provide now and in coming years. Through careful consideration of the nature of a client’s assets, the need for current and future income, tax considerations and other relevant factors, it may be possible to help that client make what may be a gift that may not have seemed possible, while preserving or enhancing present and future financial security.
1. “How Will The Baby Boomers Boom?” Robert F. Sharpe, Jr., Partnership for Philanthropic Planning Annual Conference, Anaheim, Calif. (1995).
2. Robert F. Sharpe, Jr. and Ronald Schiller, “The Campaign Counting Conundrum,” CASE Currents (September 2014), www.case.org/Publications_and_Products/2014/September_2014.html.
4. Treasury Regulations Section 664-1(d)(1)(i).
5. See supra note 3.