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How Donors Can Better Utilize Charitable Giving: BNY Mellon Wealth Management

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What You Need to Know

  • The report found that only 16% of charitable gift annuities established in 2020 were funded with non-cash assets.
  • Donors may be forgoing significant tax benefits by funding five- or six-figure gift annuities with cash.
  • Nonprofits can navigate the threat of “underwater gifts” — when a gift annuity’s assets are exhausted before the final income beneficiary dies.

BNY Mellon Wealth Management’s annual charitable gift report, released Thursday, discusses potential opportunities for donors to better realize financial and tax benefits when they fund charitable gift annuities. 

The report also shows how nonprofit groups can navigate the threat of “underwater gifts” — when a gift annuity’s assets are exhausted before the death of the final income beneficiary.

According to the report, data for nonprofit organizations revealed that 84% of CGAs established in 2020 were funded with cash assets and only 16% were funded with non-cash assets. 

BNY Mellon Wealth Management noted that given the benefits of funding gift annuities with securities that have appreciated in value, donors are overlooking this significant opportunity. They may be forgoing significant tax benefits by funding five- or six-figure gift annuities with cash, it said. 

The report also showed that 56% of the nonprofit organizations that issue gift annuities had at least one “underwater gift,” which can pose serious financial, regulatory and reputational risks if not managed proactively. 

Nearly half of educational institutions had at least one underwater annuity in 2020, followed by a quarter of social service groups and a fifth of faith-based/religious ones.

The report said nonprofits must identify and manage current underwater gifts, as well as those that are projected to go underwater, to stay on top of the financial risks inherent in issuing gift annuities, thereby protecting their reputations as responsible stewards and cultivating future gifts from their donors.

“The events of 2020 had a far-reaching financial impact on many nonprofit organizations tasked with meeting a greater demand for services and a decline in revenues due to COVID-related lockdowns,” Crystal Thompkins, head of philanthropic solutions at BNY Mellon Wealth Management, said in a statement. 

“Many of these organizations also experienced a decline in new life income gift funding in 2020. Against this backdrop, we proactively worked with clients to rethink how they could realize income and tax benefits from charitable giving, along with helping nonprofit clients to manage risk in their portfolios.” 

BNY Mellon Wealth Management’s report provides analytics and observations on charitable gift annuity and charitable remainder trust activity for more than 100 educational, faith-based, social services/other, cultural and health care organizations in calendar year 2020. 

Donor-Advised Funds

Donor-advised-fund grants distributed through the BNY Mellon Charitable Gift Fund increased by 85% year over year in 2020, according to the report. In March and April last year, the number of grants recommended by donors increased by 92% over the same time period in 2019. 

Estimates indicate that grant disbursements from the largest DAFs in the first six months of 2020 were up by some 30% from the same period in 2019. 

“During times of economic uncertainty — when capacity for charitable giving may be limited — donors with DAFs are well positioned to provide critical funding to nonprofits when it’s most needed,” Thompkins said. 

She noted that donors are also using DAFs in creative estate and tax planning strategies to promote legacy, family and next-generation giving.

Charitable Gift Annuities 

Charitable gift annuities have remained a consistently popular way to give, the report noted. For many nonprofits, CGAs can create lifetime engagement with donors at all levels of support, and can lead to deeper discussions with donors about other ways to make an impact with their giving. 

Giving through CGAs was significantly higher in the first half of 2020 than in the remainder of the year. The research data showed that gifts in June outnumbered those in December for the first time in the seven-year history of its charitable gift report.

Charitable Trusts 

According to the 2021 report, charitable trusts saw an increase in funding amounts of more than 20% in 2020, despite being funded in fewer numbers in recent years.

Charitable remainder trusts, one of the most common types of charitable trusts, help donors fulfill broader philanthropic goals and provide themselves with investment income. 

“Donors considering a charitable trust might be surprised to learn how well it fits into a long-term charitable tax and income strategy,” Thompson said. “There are a lot of creative ways donors can meet not just charitable but planning goals, too.”

For example, business owners going through a liquidity event can use CRTs to strike the ideal balance between charitable intent, desire for ascertainable cash flow as well and interest in deferring capital gains on the sale of an asset.