Presentation Transcript

1. Not-For- Profit Trendsand Gifting Methods

   William M. Guthrie, CFA, CMT Senior Vice President Regions Trust 205-264-5765 william.guthrie@regions.com
2. Non-Profit Industry Overview Nonprofit Organizations: 1,617,301 tax-exempt organizations, including: 1,046,719 public charities 115,915 private foundations 454,667 other types of nonprofit organizations, including chambers of commerce, fraternal organizations and civic leagues. (Source: NCCS Business Master File 11/2010) In 2009, nonprofits accounted for 9% of all wages and salaries paid in the United States.(Source: BEA 2010)
3. Non-Profit Industry Overview Public Charity Finances: In 2008, public charities reported over $1.44 trillion in total revenues and $1.34 trillion in total expenses.  Of the revenue: 20% came from contributions, gifts and government grants. 70% came from program service revenues, which include government fees and contracts. 10% came from "other" sources including dues, rental income, special event income, and gains or losses from goods sold. (Source: NCCS Core Files 2008) Public charities reported $2.6 trillion in total assets in 2008.(Source: NCCS Core Files 2008)
4. Non-Profit Industry Overview Charitable contributions by individuals, foundations and corporations reached $303.75 billion in 2009. Of these charitable contributions: Religious organizations received the largest share, with 33% of total estimated contributions. Educational institutions received the second largest percentage, with 13% of total estimated contributions. Human service organizations accounted for 9% of total estimated contributions in 2009, the fourth largest share. Source: Giving USA 2010) Individuals gave $227.41 billion in 2009, about the same as in 2008.(Source: Giving USA 2010)
5. Number of Registered Nonprofits by Asset Size
6. NACUBA Updates (returns) Of all participating institutions, trailing 3yr and 5yr returns were positive FY2011 vs. negative 3yr returns FY2010. Over the last 10 years, the group of all participating institutions realized an average annual net return of 5.6% This was due to the past two years offsetting losses in 2008 and 2009. However, assuming an average 4.5% spending rate, 3.0% inflation and 1% expenses, institutions will require long term returns over 8.5% per year just to break even. Asset allocation trends are as follows: equity weighting is increasing, fixed income weighting is decreasing, alternative strategies (i.e. private equity, real estate, long/short, etc.) is increasing and cash weighting is decreasing. Active investment grade strategies accounted for an average 66% vs. last years 75%. Domestic equities active strategies accounted for 73% vs. 78% last year.
7. NACUBA Updates (Debt) Amongst all reporting institutions, debt levels are trending up. Generally, larger institutions lowered average debt while smaller institutions increased average debt. Public institutions carried the heaviest average debt load at $695mm. However, this is down sharply from last years (2010) debt load of $788mm. Private institutions in contrast, reported an average debt increase to $141mm (2011) from $133mm (2010). The deleveraging trend becomes more evident in the proportion of institutions lowering debt vs. those that raised (i.e. 31% reported increasing debt while 62% reported decreasing debt). 39% of institutions with debt reported having a formal debt policy, up from 36% last year and 34% in 2009. This is up significantly from 2005 levels of 20%. Interest rate swap hedges were 43% essentially unchanged from 2010. Frequency of swap usage is positively correlated with institutional size.
8. NACUBA Updates (Gifts/Donations) The flow of gifts and donations continued to improve in the past year. 46% of participating institutions reported an increase in gifts/donations up from 43% from 2010. Similarly, the proportion reporting a decline in gift/donations fell to 31% from 42% in 2010. The largest institutions reported the highest rate of increases and the lowest rate of decreases, with 52% reporting an increase and just 18% reporting a decrease. The median size of new gifts/donations was $2.3mm, a strong improvement over $1.5mm in 2010.
9. Outright Gifts to CharitiesNon-trust Public Charities: Churches, Educational Organizations, Hospitals, Governmental Units. Qualifies for income and/or gift or estate tax charitable deduction. Income tax deduction limited to 50% of the donor’s AGI, or 30% if LTCG property is donated or if the gift is “for the use of public charity” (i.e. real estate). Private Foundations: Not publically funded – typically funded by an individual Provides control of investments. Donor and donor’s family can pool families resources and centralize management. Contributors receive an immediate income tax deduction. Gift and estate tax charitable deductions are similar to Public charity rules. Subject to many operating rules and restrictions not applicable to public charities i.e. Self dealing, excise tax on investment income, minimum distribution requirements, excess business holdings, jeopardizing investments, taxable expenditures. Income tax charitable deduction is limited to 30% of donor’s AGI for cash and ordinary income property contributions. Income tax charitable deduction is limited to 20% of donor’s AGI for LTCG property contributions.
10. Testamentary Gifts Testamentary gifts are gifts made at the death of the donor. They may arise from one of several different legal documents such as: Last Will and Testament Revocable Living Trust Gifts can also be made directly through contractual methods such as beneficiary designations: Life Insurance Retirement Plans Annuities IRA’s 401(k) Plans, etc.
11. Types of GiftsLast will and Testament/Revocable Living Trust Pecuniary Amount: A flat dollar amount directed to a particular charity Simplest type of testamentary gift Disadvantage: The dollar amount remains fixed regardless of estate value at date of death Percentage/Fractional Bequests: Last Will and Testament/Trust states that either a percentage of the estate or a fractional share be transferred to a charitable organization These types of gifts can easily track with increases or decreases in the donor’s estate values from date of execution until date of death Advantage: Percentage remains fixed regardless of estate value at death
12. Example Pecuniary: Total Estate = $4,000,000 Decedent leaves pecuniary amount of $1,000,000 to charity (25% of total estate) If estate losses value and is worth $3,000,000 at date of death: Charity still receives $1,000,00 (33.33% vs. 25%) while other non-charitable beneficiaries (i.e. family) receives 66.7% vs. intended 75%. Percentage/Fractional Bequests: Assume same facts as above. If the decedents will/trust provided for a 25% interest, both the charitable and the non-charitable beneficiaries would receive the intended proportional amount (25% and 75% respectively) regardless of the value of the estate at death.
13. Types of GiftsLast will and Testament/Revocable Living Trust Specific/General Bequests: A specific charitable bequest is a gift of a very specific or particular asset (i.e. car, antique, painting, etc.) Contingent Bequests: A contingent bequest is dependent upon the performance of an act or happening of an event. However, no charitable deduction is allowed unless the possibility that the charity might not receive the property is so remote as to be considered negligible (Remote is defined as the probability of the charity not receiving the property is 5% or less). Testamentary Split Interest Gifts: These types of gifts can be made during life or at date of death (they are referred to as Split Interest Gifts as the interest is split between the charity and the non-charitable beneficiary). Charitable Remainder Trusts (CRTs) Charitable Lead Trusts (CLTs) Pooled Income Funds Remainder Interests in a Farm or Personal Residence
14. Charitable Remainder Trusts CRT’s have two classes of beneficiaries (charitable and non-charitable) and therefore are classified as split interest gifts. To qualify for a charitable deduction the non-charitable beneficiaries interest must be in the form of an annuity interest or unitrust interest (CRAT or CRUT). If established during lifetime, donor qualifies for income and gift tax deduction for the actuarial value of the charities remainder interest. Established after death, donor’s estate will be entitled to a charitable deduction for estate tax purposes. There are four tiers of income payout to non-charitable beneficiaries. (this is done to make sure that the beneficiaries are taxed at their highest individual tax rate). Tier one: Ordinary Income, Tier two: Capital Gain Income, Tier Three: Other Income, Tier four: Return of Capital.
15. Example Charitable Remainder Trust Illustration
16. Charitable Lead Trusts Another type of split interest gift. Allows the donor to contribute a limited interest to a charity (i.e. a stream of payments for a specified period of time). Depending on type of CLT, donor may obtain an income tax and gift tax charitable deduction or an estate tax charitable deduction. Think of the flip side of a CRT.
17. Example Charitable Lead Trust Illustration
18. Pooled Income Funds A pooled income fund is another type of split interest trust. Donor transfers money or securities to a separately managed fund created by a public charity where it invested with gifts of other donors. Donor retains income interest for life but makes gift of the remainder interest. Income received is taxed as ordinary income. Donor receives income tax charitable deduction based on value of remainder interest.
19. Gift Annuities A charitable gift annuity is a contract between a donor and a charity in which the donor transfers money or other property to a charity in exchange for a fixed dollar amount over the donor’s lifetime. Can be single life or joint and survivor. Payments can be made annually, semi-annually, quarterly, monthly or more frequently. Payments may be immediate or deferred. Income Tax Treatment: Transfer of appreciated property to a gift annuity is considered a bargain sale (i.e. a transfer of property in exchange for consideration that is less than the FMV of the property). Transfer is treated in part as the purchase of an annuity and in part as a charitable gift. Charitable deduction limited to charitable gift element. Subject to recognition of capital gains. The taxation of the annuity payments is governed by the annuity rules in IRC section 72 (there are three elements for income tax purposes: tax free recovery of basis, capital gain portion and ordinary income portion.
20. Summary