President's Keyboard - Oct 2008

Planned Giving in an Uncertain Economy

"The financial world is a mess"
    -- Warren E. Buffett, October 16, 2008.

The market correction that ushered in the 21st Century and the continued market volatility is changing the planned giving landscape and certainly making it more challenging to secure planned gifts. While challenging, it is not impossible. Have you noticed one tool doesn't work for every job? Likewise, all planned gifts do not work for all donors in all economic conditions. Today it is imperative to provide donor-centered giving, matching the right type of gift to the needs of the donor.

Bequests, Not Just for Seniors
Numerous studies have shown that a charitable bequest remains the most popular type of planned gift in good times and bad times with about 80% of all planned gifts being a bequest or charitable gift annuity. Since 9/11, individuals as young as 40 have sensed the need to have a will. This younger audience like the control and autonomy a bequest provides. As you know, with a bequest, the donor has complete control of the intended gift during their lifetime, should they need it for their support or decide to spend it for their pleasure. If the donor has a change of heart, the charitable or nonprofit organization can be changed or taken out altogether, but only 7% actually do make these changes.

In Spring 2008, The Stelter Company research provided insight to who names charities in their will, when and why. The research found that the tradition target audience for most gift planners, age 60 and older, represents only a small part of all potential bequest givers. Americans are now creating estate plans with bequests to charity at a much earlier age. Younger Americans are also the least resistant to the idea of a bequest. Americans over age 70 are the most resistant if they haven't already made a bequest! This major study of Americans, aged 40 and older reveals some additional key findings for marketing charitable bequests:

• 64% over age 40 already have a will
• 7% have named a charity in their will
• 10% are good prospects to add a charity to their will
• 38% that do not have a will, plan to make one in the next few years

The research further points out an untapped group tagged the "Secret Givers" who look distinctly different than existing bequest givers and typical prospects. "Secret Givers" are secret because they are not on anyone's radar screen. Characteristics of this group are:

• 65% are younger, age 40 to 54
• 45% are not as well educated with little more than a high school education
• 38% of those with a will are open to making a future bequest
• 20% are single
• 29% have children under age 18

Expanding tradition thinking on who and at what age to promote bequest giving increases the likelihood of bequests to your organization. 42% of donors & prospective donors prefer to first learn about bequest giving by mail, then do their own research on the organization's web site. Once an organization is included in the will, rarely will it be changed. With younger donors making a will, it is possible to develop a life-long relationship with them with potential for a major gift during their lifetime.

Retirement Assets
Gifts of retirement assets make the best kind of charitable gift. The asset-devouring combination of income tax and estate tax levied on retirement assets can consume 75% of the retirement savings. Through careful planning, donors can make a charitable organization the beneficiary of their retirement assets, avoiding the income tax and estate tax on the asset leaving other less-taxed assets to their family. Another easy solution to stretch out any tax due on retirement assets is to name a charitable remainder trust (CRT) the payee. By establishing a CRT as a beneficiary of a retirement plan, the donor can turn retirement savings into a lifetime of income for their spouse or children while avoiding immediate taxation. Only when the income is distributed, the tax applies thereby stretching it over the beneficiaries' life time.

The IRA Charitable Rollover permits a donor age 70½ or older, to transfer up to $100,000 from individual retirement accounts directly to a charity without incurring federal income taxes today and avoiding future estate and income tax. While this gift arrangement doesn't qualify for a charitable deduction, the donor avoids ordinary income tax on the gift/distribution, making this appealing for donors over age 70½. Who are required to take a minimum distribution.

Life Insurance
Insurance as a charitable gift leverages the annual premium payment to create a much larger gift of the face amount of the policy. Donors can often afford the modest annual premiums on a new policy vs. giving up other income producing assets when making an outright gift. If the charity is the owner of the policy, the premiums qualify as a charitable deduction.

For existing policies with some accumulated value, the donor can assign the policy to the charity and receive a charitable deduction for the interpolated value which can be calculated with the help of the insurance agent. Other donors may have a "paid up" insurance policy already in place and can simply name the charity as the beneficiary to receive the proceeds after the insured's lifetime. While there is no current income tax deduction, the proceeds will avoid estate tax.

Real Estate
While the residential housing market is in a slump, a donor may own commercial real estate with low or no tax basis. A sale of the asset would result in the proceeds (over the tax basis) being taxed at ordinary income tax rates. Real estate gifts can be arranged as outright gifts or by using a flip charitable remainder trust that would provide lifetime income to the donor after the sale of the property by the charity. Real estate gifts take more time to arrange and the charity must exercise due diligence but the advantages to both the donor and the charity can make this gift beneficial to both parties.

Life Income Gifts
In times of low money market rates & bond yields, coupled with the uncertainty that some companies may reduce their dividends, donors seeking a higher return on their assets can benefits from several types of life income gifts which may provide steady, lifetime income such as a charitable gift annuity or a charitable remainder trust.

A charitable gift annuity assures the donor of a stream of income that is fixed and guaranteed by the charity, regardless of market conditions. With a charitable remainder trust, the donor has the choice of a fixed stream of income (annuity trust) or a flexible income stream (unitrust) that is based on a fixed percentage of the market value of the underlying assets. While features differ between a charitable gift annuity and a charitable remainder trust, the concept is the same. The donor makes an irrevocable gift, gets an immediate income tax deduction and receives income for life or according to the terms of the agreement. For example, a donor aged 69 can receive a fixed, guaranteed 6% annual payout from a gift annuity. The same donor can receive a 5% annual payout from a charitable remainder unitrust with the opportunity for increased annual income as the corpus of the trust increases in market value thereby providing a hedge for inflation. These income producing planned gifts that produce a steady rate of return give older donors the satisfaction of making a charitable gift and the security of needed income.

The first rule of philanthropy still applies, namely that donors give to a particular organization because they care about the mission of that organization. The vast majority of donors who make a gift say it is just the right thing to do. They also want to know that their gift is being used wisely and that their gifts are making a difference. For current donors, tell them what their gifts are accomplishing right now. For planned giving donors, tell them what their gifts will do for future generations.

Donors like to feel good about their giving with secondary concerns about the benefits they may receive such as an income tax deduction or lifetime income. With today's economic uncertainty, now is a good time to reach out to donors and thank them for their continued confidence in your organization. Most donors do not seek the limelight and do not want special treatment but they want to be assured that the mission of your organization, that is so important to them, will be there to serve future generations. Now is a good time to reach out to donors to assure them that the mission of your organization is vital and you are ready to plan a gift with them that will provide sustaining support your organization in the future.

What is a gift planning professional to do in uncertain economic times? Put on your tool belt and use all of your tools to create the planned gift that aligns with the needs of your donor and hope that Warren Buffet's observation will not hold true for long.

Any reference to supporting data is from a 2008 research by The Stelter Company.