Posted December 1st, 2005

Do Most Deferred Gifts Come from the Wealthy?

A common misconception that sometimes leads to poor performance in gift planning programs is the belief that most large planned gifts are made by people of great wealth. Although stories abound of six- and seven-figure bequests coming from the estates of persons who had made very modest, even tiny, gifts during life, these cases are often treated as amazing anomalies. As it turns out, these gifts are more the rule than the exception.

Sources of the myth

There are several reasons for the belief that larger bequests and deferred gifts come from obviously wealthy people. First, there is more prominent media coverage of very large bequests and other deferred gifts from the very wealthy. The $1.5 billion Joan Kroc bequest is a notable example. The donors are well known by many and make for interesting coverage. On the other hand, when a little-known widow with no living heirs passes away leaving the bulk of what might be a quite substantial estate to a small number of charities, often there are no close family members remaining to interview about the thoughtful and generous benefactor. Story elements like photos and details are hard to find, so even if one wanted to publicize such gifts more broadly, it seems there is often not much to say.

Another factor contributing to the persistence of this myth is related to major donor research. Much of the research capability in the major gifts area has been honed in the context of capital campaigns and other efforts designed to raise major dollars in a relatively short time frame. Of necessity, this research focuses on identifying those individuals with unmistakable liquid wealth, high incomes, and other obvious signs of prosperity. Research tends to look for ownership of securities, closely held businesses, expensive homes and automobiles, evidence of other philanthropic giving, and other similar indicators of the capacity to make large outright gifts.

Because many deferred gifts tend to be larger gifts, planned giving is often considered part of the major gift development tool kit. Major donors giving on an outright basis are usually affluent, so many assume that major deferred givers must be persons of wealth as well. After all, as the thinking goes, such a person must have the means to make a five- to seven-figure gift even if he or she is going to make such a gift on a deferred basis.

Stage of life is critical

Assuming a strong belief in the mission and desire to make larger gifts, the fact of the matter is that how much a person owns is not nearly as strong a predictor of the likelihood of either a major outright or deferred gift as the person’s stage in life, debt level, and distribution of assets.

Donors of large outright gifts: Major out-right gifts typically come from donors who are between 50 and 70 years old. This is a time of high disposable income generally coupled with diminished obligations to educate children or make mortgage payments. Many people in this group are still working and still receiving the largest paychecks of their lives. The reality of living on fixed income from assets for many years of retirement has not yet arrived. Income is high, debt is low, and assets are available. Major outright contributions are both economic-ally and psychologically feasible. While they may have a will or trust and other plans, most members of this group are many years away from making their final estate plans—the plans that might include the charitable designations that will result in gifts in the reasonably near term.

Deferred gift donors: Most deferred gifts in the form of trusts, gift annuities, and other similar vehicles are completed by people aged 65 to 85. At this point in life, almost all are retired, and, even if well-fixed financially, have very legitimate concerns about the possibility of outliving resources that could potentially be eroded by inflation or other factors beyond their control. They are likely to deploy their assets in their own “personal endowments” designed to maximize income while preserving the value of principal. As a result, most in this group are not the best prospects for major outright gifts no matter how wealthy they appear to be. Many will, however, consider a deferred gift as a kind of “testamentary rollover” from their own personal endowment funds to the charitable purposes they support.

Examining available data

The myth that larger deferred gifts come from persons of great wealth also persists because we have much more information about large estates than we do about smaller estates.

Of approximately 2.5 million U.S. deaths in 2003, only 72,540 (or 2.9%) estates were required to file estate tax returns. Of these large estates (over about $1 million), only 17%, or less than 12,500, made use of the charitable estate tax deduction.

Compare the fact that fewer than 12,500 wealthy persons with taxable estates died leaving gifts to charity with Giving USA’s 2003 figure of $18.13 billion coming from bequests. If those persons accounted for all of the charitable bequests in America, the bequests would have to amount to almost $1.5 million per estate! As the average bequest in this country is in the range of $25,000, and the average will contains approximately five bequests, it would take 145,000 persons to account for $18.13 billion dollars. While exact figures on the number of non-taxable estate gifts and their total value are not available, it is clear from even a rudimentary analysis that the vast majority of charitable bequests are coming from persons who die with estates that are not subject to the estate tax and could only be described as middle-income Americans. The same can be said for most gift annuitants.

Charitable remainder trusts average somewhere in the range of $500,000 nationwide. In our experience, the total wealth of persons who enter into such trusts tends to be somewhat higher than those who fund bequests and gift annuities, perhaps in the $1 million to $3 million total asset range. Such persons are definitely comfortable but not among the ranks of America’s typical major outright donor. The wealthiest persons in our society simply have less need for the additional income and asset management afforded by such vehicles and increasingly see capital gains income taxed at 15% as the preferred form of taxation when compared to ordinary tax rates of 35% or more.

“Old” vs. “new” money

Based on many years of anecdotal experience of our staff members and clients, it seems that people who inherited their wealth tend to be quite generous during life but less so in their estate plans at death. Arguably, this group of donors thinks of their wealth as being theirs only “in trust,” if you will. They did not earn it and may not feel it is not really “theirs,” and they may thus feel a strong obligation to pass it on to future generations of their family rather than making charitable dispositions at death. Meanwhile, outright major giving during life seems to be just one of the social expectations that accompany inherited wealth.

On the other hand, the experience of many gift planners indicates that those who start out with very little and build great wealth through their own labor, ingenuity, and investment skills are often less likely to be major current contributors and more likely to leave large bequests and other deferred gifts. They often hold on to assets until death because they remember times in their own lives (perhaps during a Depression-era childhood) when they did not have enough, and they fear that such times could recur, particularly if they live a long time on a fixed income.

Differing choices

While the holder/“trustee” of great inherited wealth has a choice to make as to whether to pre-serve the family’s wealth or give it all away to charity, the owner of self-made wealth has to decide whether to begin a cycle of inheritance that may continue for generations or to disperse his or her wealth back to society via large charitable bequests, thereby affording younger generations the great pleasure of building their own fortunes! Some opt for a middle ground.

The conclusion is that the very wealthy persons who do leave significant amounts to charity at death tend to be self-made persons who live below their means during their lifetimes. Such persons are more difficult to uncover utilizing traditional research techniques designed to aid success in major outright giving and are more likely to “self identify” through marketing efforts aimed at long-term, older donors making current gifts of any size.

Nowhere else to go

The discussion above assumes the holder of wealth—old or new—has living heirs who may or may not receive inheritances. By far the greatest number of large bequests come from widows or widowers or never-married or divorced persons (mostly women) who have no other living heirs. Their choice when making their final estate plans becomes whether to benefit those charitable institutions and organizations in which they believe deeply or instead leave their wealth to federal and state governments and/or relatives to whom they may not be close.

Conclusion

The damage done by the common myth that bequests come mostly from the wealthy has been incalculable over the years. This results from focusing too much energy on persons holding great obvious wealth while loyal donors of lesser amounts—some of whom may be “millionaires next door”*—are overlooked. Especially in organizations managing large donor files on computer data bases, loyal smaller donors are often ignored as they begin to lapse and ultimately cease their regular giving. This is precisely the time those donors may be planning for the ultimate distribution of the accumulated assets of a lifetime. Meanwhile, inordinate amounts of time are spent trying to encourage large deferred gifts from persons who may not have the practical ability or the psychological or spiritual inclination to make such gifts.

* A reference to the bestseller The Millionaire Next Door by Thomas Stanley and William Danko, published in 1996 by Longstreet Press, Atlanta.

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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