Understanding Different Types of Legacy Gifts

Over the next 20 years, $84 Trillion will be passed down through generations. Non-Profits are eligible to receive a percentage of this when they build out Legacy Giving Programs.

To build a successful legacy giving program, it’s essential to understand the different types of legacy gifts, how they work, and why donors may choose each option. Providing clarity on these choices helps your organization better communicate with potential legacy donors and makes it easier for them to decide how they’d like to give.

Today, you will learn variety of options that donors can use to leave a lasting impact on your nonprofit.

Here’s a comprehensive overview of the most common types of legacy gifts.

1. Bequests (Gifts in a Will)

A bequest is a gift made through a donor’s will or living trust. It’s the most common type of legacy gift because it is straightforward, flexible, and doesn’t affect a donor’s finances during their lifetime.

Types of Bequests:

  1. Specific Bequest: A set amount of money, specific asset, or piece of property left to the nonprofit.
    • Example: “I leave $10,000 to [Nonprofit Name].”
  2. Percentage Bequest: A percentage of the donor’s estate left to the nonprofit.
    • Example: “I leave 5% of my estate to [Nonprofit Name].”
  3. Residual Bequest: A gift made from the remainder (or “residue”) of the estate after other specific bequests and expenses have been paid.
    • Example: “I leave the remainder of my estate to [Nonprofit Name].”
  4. Contingent Bequest: A gift that takes effect only if certain conditions are met (e.g., if other beneficiaries pass away before the donor).
    • Example: “If my spouse does not survive me, I leave my estate to [Nonprofit Name].”

Why Donors Choose Bequests:

  • Easy to set up and modify.
  • Allows donors to support your cause without impacting current finances.
  • Provides flexibility to leave a fixed amount or a percentage.

2. Beneficiary Designations

A donor can name your nonprofit as a beneficiary of assets that pass outside a will, such as:

  • Retirement Accounts: 401(k)s, IRAs, pensions.
  • Life Insurance Policies: Donors can designate your organization as a full or partial beneficiary.
  • Bank and Investment Accounts: Donors can use Payable-on-Death (POD) or Transfer-on-Death (TOD) forms to name your nonprofit as a beneficiary.

Why Donors Choose Beneficiary Designations:

  • Simple process: Only requires completing a form with the account administrator.
  • Doesn’t require a will or visit to a lawyer.
  • Avoids probate, allowing assets to transfer directly to the nonprofit.

Example:

  • “I designate [Nonprofit Name] as the beneficiary of 25% of my IRA.”

3. Charitable Trusts

Charitable trusts are more complex but offer significant benefits for donors with larger estates or specific financial goals. There are two main types of charitable trusts:

  1. Charitable Remainder Trust (CRT)
  • What It Is: A trust that provides income to the donor (or other beneficiaries) for a set period or for life. Afterward, the remaining assets go to the nonprofit.
  • Benefits for Donors:
    • Immediate tax deduction when the trust is created.
    • Provides income during the donor’s lifetime.
    • Reduces capital gains taxes if appreciated assets are used.

Example:

  • “I establish a Charitable Remainder Trust that pays me income for 20 years, after which the remainder will go to [Nonprofit Name].”
  1. Charitable Lead Trust (CLT)
  • What It Is: A trust that provides income to the nonprofit for a specified period. After that period, the remaining assets return to the donor or other beneficiaries.
  • Benefits for Donors:
    • Allows donors to support your nonprofit now while preserving assets for heirs.
    • Potential reduction in estate and gift taxes.

Example:

  • “I create a Charitable Lead Trust that pays [Nonprofit Name] $10,000 annually for 15 years, then transfers the remainder to my children.”

4. Life Insurance Policies

Donors can name your nonprofit as a beneficiary of an existing life insurance policy or take out a new policy with your organization as the beneficiary. They can also transfer ownership of the policy to the nonprofit.

Ways to Give with Life Insurance:

  1. Beneficiary Designation: The nonprofit receives the death benefit upon the donor’s passing.
  2. Transfer of Ownership: The donor transfers the policy to the nonprofit, which can choose to keep the policy active or cash it in.

Why Donors Choose Life Insurance Gifts:

  • Leverages a relatively small premium into a significant future gift.
  • Doesn’t affect the donor’s current assets or estate.
  • Provides a simple way to create a legacy gift.

5. Real Estate

Donors can leave real estate to your nonprofit through a bequest or transfer ownership during their lifetime.

Types of Real Estate Gifts:

  • Homes or Vacation Properties
  • Commercial Real Estate
  • Land or Farms

Options for Donors:

  • Retained Life Estate: The donor gifts their property to the nonprofit but retains the right to live in it for the remainder of their life.

Why Donors Choose Real Estate Gifts:

  • Significant impact: Real estate gifts can be substantial in value.
  • Offers potential tax benefits and the ability to continue using the property during their lifetime.

6. Donor-Advised Funds (DAFs)

A donor-advised fund is like a charitable investment account. Donors contribute to the fund, receive an immediate tax deduction, and recommend grants to nonprofits over time. They can also designate your nonprofit as the beneficiary of the remaining balance upon their death.

Why Donors Choose DAFs for Legacy Giving:

  • Immediate tax benefits while retaining control over grant recommendations.
  • Simple way to leave a final gift by naming your nonprofit as a beneficiary.

7. Stocks and Securities

Donors can leave stocks, bonds, or other securities to your nonprofit through their will or as an immediate gift.

Why Donors Choose Stock Gifts:

  • Avoids capital gains taxes.
  • Provides a larger gift compared to selling the stock and donating the proceeds.

Summary Table: Types of Legacy Gifts

Type of Gift

How It Works

Why Donors Choose It

Bequests

Gift in a will or living trust

Simple, flexible, doesn’t impact finances during lifetime

Beneficiary Designations

Name nonprofit as a beneficiary of assets

Easy, avoids probate, no lawyer needed

Charitable Trusts

Provides income to donor or nonprofit, then a gift

Tax benefits, income stream, good for large estates

Life Insurance

Nonprofit named as beneficiary or owner of policy

Affordable way to make a significant gift

Real Estate

Gift of property or retained life estate

Significant value, potential tax benefits

Donor-Advised Funds

Recommend grants and leave remaining balance

Immediate tax benefit, final gift upon death

Stocks/Securities

Gift of appreciated stocks or bonds

Avoids capital gains, maximizes impact

 

Understanding the different types of legacy gifts allows your nonprofit to offer donors a range of options that suit their personal, financial, and philanthropic goals. By being knowledgeable about these options, you can guide donors through the process, making it easy and rewarding for them to leave a lasting impact on your mission.

Additionally, there are 3 important things that must go in the bequest language, which is covered in detail in our free guide, The Legacy Giving Playbook. If you're a non-profit and need guidance on how to launch your legacy giving program, this is available for free download today.

 

Need help creating a Legacy Giving Program for your organization? Email us: LimitlessEarthOrg@Gmail.com

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