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by Robert F. Sharpe, Jr.
In last month’s issue of Give & Take we examined the underlying
factors that motivate people to make charitable gifts: religion,
social theory, political orientation, emotions, and economics and other factors.
In reality, gifts are rarely motivated by just one of these concerns; they
typically result from the complex interaction of several of these factors,
changing with each donor and his or her particular circumstances.
 But
it is not enough simply to explore why donors make gifts. In
today’s environment, it is becoming more and more important to examine why
people sometimes don’t make gifts they would otherwise like to
complete. Understanding the financial concerns that can stop people from making
gifts is the key to making sense of what is commonly referred to as “planned
giving” or “gift planning.”
Experience shows that
the financial concerns that can act as “demotivators” of charitable gifts
fall into four broad categories:
Successful gift
planners understand these fears and know how to use gift planning vehicles to
create solutions.
Dying too soon
Many persons who would like to make a substantial
gift worry that they could pass away without fulfilling their financial
responsibilities to loved ones. It seems no one is immune from these anxieties,
regardless of age. Younger persons may be anxious about providing for dependent
children. Those in their middle years feel a responsibility to care for aging
parents, and an older donor’s need to care for a surviving spouse often
eclipses the desire to make charitable gifts.
Living too long
About the time that people begin to worry less
about dying too soon, they can become anxious about outliving their resources,
especially in times of lower interest rates and fluctuations in equity markets.
Fundraisers enjoyed a reprieve from this problem during the past two decades,
when rapid economic growth and relatively high interest rates made many donors
feel a greater sense of financial invulnerability. Now, however, more and more
persons are beginning to contemplate how they will support themselves over the
long term in times of single digit returns on both equities and income-producing
investments.
Illness and economic
emergency
As the cost of healthcare continues to rise, the
need to preserve funds for a potential illness is becoming increasingly
pressing. Many also worry about the health of the economy and are wondering if
their jobs are secure.
Mental and/or physical
disability
 As
life expectancies increase, persons of all ages are beginning to realize the
importance of preparing for the possibility of long-term mental or physical
disability.
The mixture of one or more of the above concerns
is at the heart of most persons’ decisions not to make a larger gift they
would otherwise like to make. These fears do not remain constant throughout life
but rather vary with age and economic capability, as seen in the chart above.
The role of gift
planning
To raise significant funds in today’s environment, development officers
must acknowledge the concerns outlined above and determine if and how a gift
planning tool can help alleviate these anxieties and fulfill a donor’s desire
to give. When the donor’s best interests are kept at the forefront, the
process of gift planning can and does make perfect sense.
There are two basic categories of gift planning
vehicles that can help a motivated, but anxious, donor make a gift. Many gift
plans allow donors to make revocable gifts that give donors the
freedom to change their minds if they need to access the funds at a later date.
Because their revocability precludes tax benefits, these plans are also
sometimes referred to as “non-qualified” plans. Development officers at
times refer to these plans as “expectancies” because no gift is actually
completed from a legal standpoint until someone’s death. The primary plans
that fall into the revocable/non-qualified/expectancy category include the
following:
- bequests via will
and living trusts
- remainders of
retirement plans
- life insurance
beneficiary designations
- jointly owned
investments with rights of survivorship.
On the other hand, irrevocable
gifts involve a commitment to the permanent transfer of one or more interests in
property. Because the donor has parted with something at the time of the gift,
tax benefits are often available. These gifts are thus also sometimes referred
to as “qualified” plans. And because the enjoyment of the gift is delayed to
some later point in time, these gifts are often referred to as “deferred
gifts.”
Irrevocable/qualified/deferred gifts are built on
an underlying “operating platform” that is a trust, contract, or deed. These
plans include the following:
- gift annuities
- charitable
remainder trusts
- pooled income
funds
- charitable lead
trusts
- life estates in
real estate.
The revocable and irrevocable plans described
above are often referred to collectively as “planned gifts,” an umbrella
term that actually includes both “expectancies” and “deferred gifts.”
Prescribing the right
plan
The process of deciding which plan is best for
the donor starts with listening to both the donor’s motivations and
hesitations. If you have a prospective donor who clearly would make a gift but
for one of these common fears, look below for some possible solutions.
Dying too soon
Bequests via will. The most
common form of planned gift is the gift by will, with the largest bequests
typically coming from the residue of an estate. Because this plan assures that a
gift is made only at death and only after specifically providing for loved ones,
bequest gifts appeal to persons who are afraid of depriving an heir of economic
security. Leaving retirement plan proceeds or the remainder of a retirement plan
or living trust to charity can accomplish the same result as a bequest with
probate savings and possible other advantages.
Charitable lead trusts.
Many planners place too much emphasis on the estate tax benefits a lead trust
can offer. There are much more effective ways to pass property to family
members. As a result, lead trusts are typically entered into by people who want
to make significant charitable gifts over time but do not wish to disinherit
their heirs or die without providing for their future economic security. The
lead trust is one answer in this situation, as it allows persons to make the
gift they wish to make while dealing with the fear they will “die too soon.”
To such persons, the tax savings are important but not necessarily the primary
motivator.
Living too long
 Bequests via will,
trusts, retirement plans, and life insurance. Like those worried about
dying too soon, donors concerned about living too long will often delay a
substantial gift until their death so they are assured access to all of their
funds. The gift is usually “deferred” until death, but charitable remainder
trusts for a term of years offer the option of keeping income for a limited
period of time.
Gift annuities.
Ironically, the fear of outliving funds can lead others to transfer funds
irrevocably to charity in exchange for a lifetime of fixed payments. Deferred
gift annuities offer a solution for someone who has adequate income now but
worries about needing income in the future.
Charitable remainder
trusts and pooled income funds. These plans offer many of the same
advantages as bequests and gift annuities for those concerned with long-term
economic security.
Life estate
agreements. Transferring the ownership of a home at death while retaining
the right to occupy and enjoy the home for life offers current tax benefits
while helping maintain financial security.
Charitable lead
trusts. A donor who does not need income today but wants to be able to
access principal in the future may be interested in a variation of the
charitable lead trust where the ownership of the funds reverts to the donor at
the end of a period of time.
Illness and economic
misfortune
Charitable bequests at
death. As discussed above, bequests allow retention of funds if necessary
in case of a temporary illness or economic reversal.
Gift annuities. Gift annuities assure a
steady flow of income for medications and other illness-related expenses in
later life.
Charitable remainder
trusts. When a donor transfers assets to a charitable remainder trust, the
transfer must be irrevocable, largely because of the tax savings involved. These
trusts existed prior to tax savings, however. Why? One reason is that when you
create such a trust the bad news is you cannot access your principal if needed.
The good news is that no one else, including creditors, can either. For this
reason, some persons who would not otherwise make a large charitable gift may do
so in a way that assures that no matter what happens, they will always have the
income from the trust.
Mental and/or physical
disability
Gift annuities. Gift annuities provide an
income source that will continue regardless of the donor’s mental or physical
health. This is especially important for those who worry about being able to
manage their assets in later life in case of permanent mental and/or physical
disability.
Charitable remainder
trusts. Charitable trusts offer more flexibility than gift annuities. They are
often used by persons who would like to make large gifts but want to ensure that
an income is retained in case of disability. Unlike a gift annuity, a charitable
trust allows the donor to create a structure that can provide future increases
in the amount of income received and to select the trustee of the funds.
Taxing issues
Any gift, revocable or irrevocable, in which
funds are transferred at death can offer estate tax savings. But as over 90% of
charitable bequests come from nontaxable estates, tax avoidance is obviously not
the only motivation for such gifts.
Tax savings are more of a factor for irrevocable
gifts that involve transfers of assets during lifetime with a retained interest
for the donor or another person. The charitable benefits generally amount to
what the donor gave minus what the donor retained, but far too much energy is
expended in the process of determining these benefits, maximizing them, and then
pretending they are the prime motivator for the gift. In fact, they are only one
of many benefits of the gift and almost always total only a fraction of the
assets transferred.
The motivation to make a gift clearly comes from
somewhere else. The key for gift planners is to view the process of gift
planning as a way to help donors overcome their fears and make the gift they
feel inspired to make.
There are two ways to approach gift planning. You
can begin with a “who”—a prospective donor—and then find a “why,”
“what,” “when,” and “how” to finalize the gift. Or you can start
with the solution and work backwards to the challenge facing the donor.
The first scenario occurs naturally when an
experienced development officer is working directly with donors. When focusing
on the “who” and “why” of the gift, the development officer will
naturally be led to the “what,” “when,” and “how” and can often
arrive at an agreeable situation for both parties.
But what about the majority of donors you never
have an opportunity to talk with face to face? This is where the mass
communications aspect of gift planning comes into play. Through targeting
information based on the age and wealth of donors, information can be conveyed
that is designed to anticipate the reasons people may not make larger gifts.
Various gift planning concepts can be exposed along with examples of persons who
have made use of them. Donors are then given an opportunity to self-identify
themselves as having an interest in making a gift in a particular way.
At that point, a potential donor has provided you
with the what, when, and how of the gift. It is tempting to try to complete a
gift at that point, but unless you discover who the donor is, and why the donor
wants to give, you may proceed with a gift that is not the best fit for that
donor.
Being a successful gift planner always requires
patience and a genuine concern for donors’ well-being. As long as you keep
their wishes and needs at the forefront, you can use your experience and
expertise to help them make what may be their gift of a lifetime.
Editor’s note: This article completes a two-part series begun in the February 2003 issue with
“Why Do People Give?” Both articles are based on material covered in more
depth in the Sharpe seminar series. This article is excerpted from Session 3 of
Major Gift Planning I. See page 7 for information about future seminar
offerings.
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