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By Robert F. Sharpe, Jr.
Even in the face of reported declines in overall
fund raising, it should not be surprising to
find that bequests remain a relatively reliable
source of income and continue to represent a significant
percentage of total funding for many organizations. In
fact, in both good years and bad, many of the largest
charitable gifts take the form of unexpected bequests,
structured most often as all or a portion of what
remains of an estate after first satisfying bequests to
other heirs.
Charitable bequests remain relatively steady
in challenging economic times for two primary reasons.
First, actuarial realities continue regardless of
economic conditions. As people pass away and their
estates settle, bequests continue to be received and can
represent the difference between a budget shortfall and
a surplus in a given year.
Additionally, after extended periods of economic
slowdown, history reveals that bequests gradually tend
to assume greater importance and represent larger percentages
of individual gift income. For example, Council
for Aid to Education (CAE) reports reveal that bequests
represented 27% of charitable giving from individuals
in 1982, following one of the worst economic downturns
in decades. Historically high levels of bequest income
were also experienced during the period following the
crash of 1987 and the recession of the early 1990s.
Looking back even farther, 70% of the major gifts
reported in 1932 came in the form of bequests.
Conversely, during times when the economy is
booming and stock markets are at their peak, bequest
income tends to represent a smaller percentage of overall
giving.
The Chronicle of Philanthropy reports that 7 of the
10 largest gifts in 2008 were bequests. By comparison,
there was not a single bequest listed among the top
gifts in 2007, when stock markets were at record highs. In flush times, larger numbers of donors take advantage
of increased stock and real estate values to make
larger outright gifts.
Expect an echo effect
Even after the current economy rebounds, charities
can expect to experience an “echo” effect, or a period
in which bequests continue to be prevalent. Sharpe
studies of thousands of actual estates received by
many organizations of various types confirm that the
average lag time between the making of the final will
that leaves funds to charity and the death of the donor
is approximately five years.
This five-year lag time between the making of the
final will that includes a charitable bequest and its
eventual receipt by a charity explains why it is so vital
to continue emphasis on bequests during the worst of
economic conditions. It is during an economic downturn
that some donors, especially older and wealthier donors, may opt for bequests in lieu of larger outright
gifts. In the past, this trend has been reflected in
an increase in the percentage of bequests and other
planned gifts in campaigns for various purposes during
times of economic challenge. The receipt of bequests in
the late 1930s, for example, helped lend momentum to
the doubling of charitable giving during the recovery
period from 1933 to 1941.
Age matters
IRS data reveals that those who leave bequests,
especially wealthier donors with taxable estates, tend
to be relatively older persons. In fact, about 75% of such
bequest donors pass away after the age of 80. Sharpe
research reveals that the average age at the time of
making a will that leaves a charitable bequest is the
late seventies or early eighties, approximately five
years before death.
Other reports also indicate the average lifespan
of the wealthiest donors may be well above average.
For example, The Chronicle of Philanthropy recently
reported that bequest donors among the ranks of the
top 50 donors overall in 2009 died at an average age of
92. Only two out of eleven died before reaching the age
of 90—one at 85 and one at 62.
Missing a window of opportunity?
Some fundraisers believe they should focus marketing
efforts on younger donors because donors 70 and
older have “already made up their minds” and “won’t
change their wills.” However, many of those with years
of experience in the field know that nothing could be
farther from the truth or have the potential to do more
harm than basing the core of marketing efforts on
these assumptions.
It is obviously true that donors to some organizations
will include those charities in early wills when
they are first married or have children. Others may
include charitable interests in wills completed in their middle years. For these reasons, it is important to
make periodic efforts to be included in the wills of all
interested persons to help ensure a continued flow of
bequest income some 20 to 50 years from now.
In times of economic stress, however, it is more
important than ever to carefully allocate limited
resources and make every effort to discover and work
with the donors who are likely to be making their final
estate plans.
Keep in mind also that many types of organizations
don’t even acquire bequest donors until relatively late
in life. Recently a nationally known organization studied
all bequest files for a given year to determine the
age at which actual bequest donors made their first gift
to the organization. The 80 bequest files revealed that
bequest donors made their first gifts at an average of
75, which was also the median age. Most of the donors
did not make the final will leaving bequests until they
had been on file for a number of years. For this reason,
it is important to understand who your bequest donors
really are!
Numbers up, value down?
Despite the surge of bequests during periods of
economic distress, management must understand that
while the number of bequests may increase, their average
size may be depressed somewhat, especially during
the current period of downturn.
Recall that the largest bequests often come from
residuary estates. Imagine a donor with an estate of
$750,000 executes a final will that provides for distributions
of $100,000 each to five nieces and nephews.
After these distributions, the will stipulates that the
remainder be split among seven charities. If the donor
passes away while the estate is valued at $750,000, the
nieces and nephews would receive $500,000 “off the
top” of the estate with the remaining $250,000 divided
among the charities. Each charity would receive a little
less than $36,000, which is a fairly typical charitable
bequest.
Now suppose that the donor had 20% of his or her
assets ($150,000) invested in a Dow index fund that fell
30% prior to the donor’s death. The original $150,000
amount would be reduced to $105,000. The entire drop
in value ($45,000) would be absorbed by the residuary
estate. The residue would then amount to only
$205,000—not $250,000—and each charity’s share
would drop by 18% to just over $29,000. Even in estates
that don’t include securities, similar effects can be felt
as a result of declines in real estate values.
Declines in asset values thus help explain why the
amount of funds received from estates planned in the
past may actually decline even when the number of
bequests increases.
Part of the solution to the downward pressure
described above is to take steps to ensure that an
organization will stay in as many estates as possible.
Charities that are maintaining strong relationships
with donors in their final years on file, especially those
who have previously revealed the presence of a bequest
in their estate, will find they may be able to counter
declines in average-size bequests.
For example, imagine if after the final will was
completed in the case above, the donor decided to
remove two of the seven charities because they had
not been in touch since they sent a notification of their
intention, while the other five had done an excellent
job. In that case the smaller residue would be split five
ways instead of seven and each of the remaining charities
would receive $41,000, more than they would have
received prior to the economic downturn and 40% more
than the $29,000 that would otherwise be expected
after the market slump.
This “math” explains why organizations with
strong and effective bequest awareness and stewardship
programs may see less impact from periods of
economic distress than others.
Another way to counter drops in bequest income
due to declines in average size is to encourage as many
“new” bequests as possible from age-appropriate donors
or constituents. This may best be accomplished by
using the Sharpe Gift Planning Matrix© to
focus your marketing budget and staff time on the oldest
portion of your file that is likely to produce tangible
bequest maturities in the relative near term.
The next few years will be critical ones for charitable
entities that wish to remain viable in light of an
aging population and what may be an extended period
of slow economic growth. Fund development executives
need to understand where bequests come from and
take the steps necessary to influence larger numbers
of donors who are in the process of making their final
estate plans.
Note: This article is excerpted from Sharpe’s popular
seminar “Introduction to Planned Giving.” See page 3
for more information about Sharpe seminars.
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