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The current recession has brought
with it increased unemployment and
job fears; reduced dividends, interest
and other earnings; and lower
real estate and investment values.
Many have seen their ability to
make larger outright gifts decline in
step with the market. Nonetheless,
the field of philanthropy remains
resilient and history reveals that
Americans’ desire to give will continue
for the most part unchanged,
even in these tough times.
Where to turn
These days, retaining existing
donors may be even more
important—and cost-effective—than
acquiring new ones. Current donors,
especially those with a long history
of support, should be specially cultivated
and treated with the respect
and gratitude they deserve. This
includes giving them the option
to break gifts into installments
or otherwise being flexible with
pledge fulfillment. It is also helpful
to inform donors of other giving
options that may be particularly
attractive to them in today’s environment,
including gifts of stocks that
may still be worth more than they
cost, lead trusts, life estate agreements,
IRAs, remainder trusts, and
bequests.
Gifts of appreciated securities
Despite the bad news on Wall
Street in recent months, keep in
mind that many donors, especially
those in their sixties and older, still
have significant amounts of securities
that are worth more than they
paid for them and yield little income.
It can make sense for donors to give
these securities and use the cash
they might have otherwise donated
to repurchase other investments
and enjoy a new higher cost basis.
The securities may also be good candidates
to fund gift annuities and
other gifts that result in immediate
tax savings and increased income.
Charitable lead trusts
Charitable lead trusts have been
the fastest-growing form of charitable
trust in recent years, with a
growth rate of 40% between 2001
and 2007. In fact, IRS figures reveal
that nonprofits receive more funds
from lead trusts than from the much
more commonly executed charitable
remainder trusts. This is, in
part, explained by the fact that lead
trusts provide income to nonprofits
every year while remainder trusts
typically benefit the charity only
upon the termination of the trust.
Lead trusts are no longer a
planning tool used only by the super
wealthy. In fact, most lead trusts
(63%) report assets to the IRS of
less than $1 million. The average
size of those trusts is just $374,000,
roughly the same size as charitable
remainder trusts holding assets
under $1 million.
Further, the current low
discount rate used in the gift calculation
process makes the lead trust
even more attractive. The February
discount rate of 2.0 was the lowest ever for such calculations and the
continued low rates mean that
“zeroing out” for gift and estate
tax purposes can be accomplished
over a shorter term of years, with
a lower payout rate, or through a
combination of both.
With today’s lower asset
valuations, many advisors are
encouraging their clients to fund
lead trusts with discounted assets
they assume will regain value
after the recession in the hope that
the “real value” will ultimately be
distributed to their family free of
tax at the termination of the trust.
Note that as of May 2009, it is possible
to pass an unlimited amount
to heirs free of gift and estate tax
with a payment of just 6% to charity
for 22 years.
The value of life estate agreements
The lower AFMR used in gift
calculations can also add appeal
to life estate agreements for farms
and personal residences, including vacation residences. Such an
arrangement can provide donors
with substantial and immediate
income tax savings without affecting
their lifestyle. Some donors may be
able to enjoy up to six years of tax
savings.
Depending on whether the
property has appreciated or if the
deduction is too large to use even in
six years, in some cases donors will
benefit from taking the 50% election
and basing their deduction on
the cost basis of the property. This
can allow them to claim a charitable
deduction of up to 50% of their AGI
instead of the 30% limitation for
gifts of appreciated property.
For example, if a donor purchased
a vacation home a few years
ago that has seen little or no appreciation,
this extra residence may
provide significant tax relief that
will increase after-tax spendable
income for up to six years.
IRAs
Donors over the age of 70½
have until December 31 of this year
to make tax-free charitable gifts
up to $100,000 from traditional or
Roth IRAs. Even though minimum
required distributions have been
waived for 2009, the charitable IRA
provision still provides an important
giving opportunity for individuals
who do not anticipate needing IRA
funds themselves. Under previous
Pension Protection Acts, the majority
of IRA gifts came from persons who
enjoyed more than adequate retirement
funds and chose to make large
gifts up to the $100,000 maximum.
Using unneeded IRA funds for
gifts allows donors to make larger
gifts today without affecting their
other cash flow or income. The best
prospects may be those over 70½
who are covered by pension plans,
business owners, or executives and professionals who took advantage of
the “unlimited IRA” provision in the
1980s that allowed anyone with an
income to establish an IRA. Though
Congress later enacted income limits
to stop those with high incomes
from “sheltering income” with an
IRA, these “orphaned” IRAs may
represent an attractive pocket for
giving for some seniors.
Keep in mind also that wealthier
seniors may be well advised to give from these funds because
they can be subject to both estate
and income taxes when ultimately
received by non-charitable heirs.
Getting their money back
Some prospects that would have
been receptive to a six-figure pledge
or gift before the recession may not
be as comfortable with that possibility
today. However, they may
consider making a gift if they feel
they could retain income equal to
the value of the gift over time.
For example, a donor could
establish a 10% ten-year CRAT. The
donor receives an amount equal to
the amount originally placed in the
trust over the 10-year period and
the charity receives the remainder.
Depending on the assumption made,
the charity might receive 50-60% of
the initial value of the trust while
the donor receives fixed payments
over the trust term.
Bequests
Finally, do not forget to encourage
bequests and other planned gifts
from older donors that can benefit your charity in the relatively near
term. Most charitable bequest
maturities come from persons
that pass away in their seventies,
eighties, and nineties whose last
will and testament, living trust, or
other arrangement were finalized
just a few years before death. In
times like these, it may make sense
to direct more time and resources
to your oldest long-term constituents,
who are more likely to be
making their final plans in the next
few years.
During the early years of
the Great Depression, charitable
bequests from older donors provided
a much higher percentage
of larger gifts and helped many
charitable organizations survive
those turbulent economic times.
As was noted earlier this year,
seven of the ten largest gifts
reported in 2008 came in the form
of charitable bequests, so it would
appear that this trend may already
be underway.
The big picture
Now is not the time for business
as usual. Those charged with
fund-raising responsibilities must
think creatively to find ways to
make giving more appealing and
effective for donors. By looking at
the big picture—including market
conditions, family and other
donor obligations, and changing
tax laws—development officers can
help their supporters fulfill their
personal and charitable goals.
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