Posted March 1st, 2009

Brother, Can You Spare a Million?

By now we all know of one or more organizations or individuals whose “rags to riches” story has become “riches to rags.” Large amounts of wealth have, indeed, been lost in recent months—much, though certainly not all of it, by those at the top.

Many nonprofit institutions and individuals have in some cases lost 30% or more of their assets. As a result, corporate sponsorships, six and seven-figure gifts, and expensive gala tickets may be more difficult to come by for a while.

History tells us that it is still possible to raise significant amounts of money for charitable purposes, even in the worst of economic times. We may, however, have to structure our fund-raising efforts somewhat differently.

In this era when corporate jets have been shrink-wrapped and placed in storage and Wall Street CEOs are accepting salaries of only $1, spending money conspicuously— even in the name of charity—is, at the moment, out of style.

But keep in mind that by no means has everyone lost everything. Just as some nonprofit endowments and reserve funds have fared better —or less badly—than others, so have some donors preserved more of their assets than others.

Let’s consider how we, as fundraisers, might adapt to these realities:

  • Invest time in creative and insightful donor research. Consider which industries and which donors are more likely to have fared comparatively well during this downturn.
  •  Concentrate on the most loyal donors. Help them make wise and thoughtful gifts that mean the most to your mission, make the most sense for the donor, and allow them either to make the largest gift possible today or to make even larger gifts in the future.
  • Understand and be prepared for an increase in anonymous giving. Public displays of wealth—even as gifts to charity—may be perceived by some donors as less appropriate than in the past. Other donors may be concerned about other groups seeking funding as a result of their publicly announced gift.
  • Assume that more donors may be able to make their “ultimate gift” only as part of their overall estate plan. In uncertain times, individuals of all wealth levels are naturally more skittish about making large, irrevocable gifts of cash during their lifetime. We must recognize this reality and stand ready with real-world solutions for the age-old “I’d like to give more, but …” or “I wish it could have been more, but…”

Keep in mind also that many of your organization’s best donors may fit the profile of those who, on the whole, are less affected by the current economic downturn. Remember the attributes of the “Millionaire Next Door”—they are generally frugal, own their home outright, drive a car for ten years or more, often own their own small business, and expect their children to pay for their own educational expenses.

Donors who meet this profile may have been less likely to have been caught up in the sub-prime mortgage crisis, plowed savings into a stock market trading at unprecedented price/earnings ratios, or to have lost their job.

Also don’t forget that many among the ranks of older donors may have been more heavily invested in bonds and higher yield, stable securities as a source of reliable income. These donors, too, may be relatively unaffected in their ability to give.

Rebuilding endowment

Some charitable organizations and institutions were, in hindsight, participants in “too good to be true” investments that in fact turned out not to be true. Others, meanwhile, had relatively low exposure to more troubled segments of the investment universe and saw much less decline in their endowments.

Any significant reduction in endowment values is, however, cause enough for concern. Fortunately, for creative and resourceful organizations, there are ways to act prudently today to rebuild endowments.

It is important to stop and consider the ways in which many endowments were originally built. In a white paper titled “Sources of Endowment Growth at Colleges and Universities,” published by the Commonfund Institute and authored by Fred Rogers and Glenn Strehle (available in its entirety at www.commonfund.org), it is noted that:

“We know from annual surveys of fund-raising results that over one-fourth of individual giving [to higher education] comes in the form of bequests and the present value of deferred gifts. While bequests can be directed to any purpose, we believe that one measure of success is the relationship between average annual bequests and the total endowment fund.”

The authors further state, “We also know that many schools try to allocate most of their large unrestricted bequests to quasi-endowment funds. As a result, bequests are an important part of almost all efforts to expand gifts to endowment. When we look at the high achievers, they all have strong bequest and deferred giving programs.”

Commenting on the source of bequests that build endowment, the authors note, “It is particularly important that the president and key trustees understand that the potential donors of large bequests include some alumni and friends who may not be among your largest donors during their lifetimes. Many of these potential donors are elderly and may not be able or interested in meeting with anyone except long-time friends from your school. Many have no direct family heirs. One measure of success is the ability to become the principal or primary beneficiary of their estates. Such bequests frequently come from those who lived modestly and never achieved leadership in their profession. They did know how to build or preserve financial wealth and also how it can be effectively used by future generations.”

Efforts today to influence bequests from older constituents who may be in the process of making final estate plans can thus be a key component in efforts to rebuild endowments in the relatively near-term at low cost.

In addition to encouraging unrestricted bequests as a means of replenishing endowment funds, some may also wish to consider small, exclusive funding campaigns promoting specialized giving vehicles such as large gift annuities, term-of-years remainder trusts, and lead trusts that make estate and financial planning sense in today’s environment. [See the February 10, 2009 Wall Street Journal on the attractiveness of lead trusts.]

Such a campaign may break some of the traditional rules—less emphasis on naming opportunities and other quid-pro-quo gifts, no publicly announced goals, etc. The gifts that result may or may not serve to permanently replace lost endowment funds.

The lead trust can, for example, be thought of as a form of “temporary endowment.” A lead trust makes payments to charity for a period of time before transferring assets to heirs.

Consider if only 10 individuals funded charitable lead trusts of $1 million, each paying 6% to a charitable recipient for 15 years. In this case, the organization could “replace” an endowment spending shortfall of $600,000 for each of the next 15 years. A solution like this might be thought of as a short-term “endowment patch” while buying time for the organization to find a more permanent solution.

In appropriate cases, an organization might also encourage the same donors who created the lead trusts, or others, to establish $1 million charitable remainder trusts that would pay the donors 6%, or $60,000 per year, for 15 years.

If the trusts earn 6% per year total return, the remainder of each trust would be worth $1 million at the end of 15 years, and would “replace” the funds leaving the lead trusts that no longer generate funds for the charity. These “endowment mirror trusts” work in tandem to replace lost endowment, first temporarily, and eventually permanently.

Final thoughts

The missions of our nation’s nonprofit sector are still vital and many motivated donors still have resources to provide. Tools are available to help provide funds for current operations and capital needs or to “stretch” or “patch” endowments while we await recovery of value and/or permanent replenishment from traditional sources.

Now more than ever is the time to show those who care most about your organization ways to fund your mission now and in future years—while still assuring future financial security for themselves and their loved ones.

The publisher of Give & Take is not engaged in rendering legal or tax advisory service. For advice and assistance in specific cases, the services of your own counsel should be obtained. Articles in Give & Take may generally be reprinted for distribution to board members and staff of nonprofit institutions and other non-donor groups. Proper credit must be given. Call for details.

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