In recent weeks much has been written about the lackluster performance of stock markets in 2000.
What has the impact of softer markets been on charitable giving in general and planned giving in particular? Early reports for the last quarter of 2000 are spotty with some organizations and institutions reporting mixed results, particularly in receipts of stock gifts. Others are reporting record years, particularly in bequest receipts and in newly funded gift annuities and charitable remainder trusts.
In this article we will examine how different planned giving prospect groups may react to changing economic conditions.
Younger planned gift donors
Donors in the youngest segment of traditional planned gift donors — persons aged 55 to 65 — may have been among the most heavily affected group in terms of reductions in asset values. In this age group, pre-retirement for most, assets tend to be invested more heavily in equities, with more participation in investments with higher growth — and risk — potential.
Many donors in this age group may have securities that have decreased in value since they have owned them, but still have gains that would translate into capital gains tax liability if sold. Donors with outstanding pledges should be reminded that from a tax planning standpoint it may be better to give securities that still have any gain in them rather than make gifts of cash. Cash can be used to repurchase the same securities and thus enjoy a higher cost basis and less gain when stock prices recover in the future.
Deferred gift annuities and trusts that feature relatively high payouts for a short term of years may be appealing to the 55-to-65-year-old donors as well. Such gifts can be a way to lock in a higher income today while enjoying income tax savings and diversification that can be achieved without sacrificing a portion of their remaining asset values in capital gains taxes.
Older planned gift donors
For donors in the 65- to 75-age group, different plans may be in order. As donors in this age range tend to be retired and more heavily invested in bonds and “old economy” stocks, they may actually have seen increases in their net worth over the past year, although not in the magnitude of prior years. For persons who hold a significant portion of their investment portfolio in bonds, lower interest rates in recent months may have led to increases in the value of that portion of their portfolio. Now may be a good time to remind such donors that charitable remainder trusts for life, current and deferred gift annuities, and other traditional planned giving tools may offer attractive opportunities to diversify their holdings in a tax-free manner while enjoying income tax deductions and what may be a generous flow of income.
Expect gift annuities and charitable remainder annuity trusts to be of greater interest to this and other age groups than in recent years. Remembering the old adage that “a bird in the hand is worth two in the bush,” a 70-year-old may find a fixed income for life of 7% to be more attractive than a 5% or 6% unitrust that may or may not offer growth in income in coming years. In times of lower interest rates, a larger percentage of income from annuity trusts may be reported by the donor at more favorable capital gains tax rates under the tier structure of reporting income from such trusts.
Discussions of reduced estate and gift taxes may also call more attention to the income element of planned gifts and lead to more interest in establishing such gifts during life rather than as part of more long-range estate planning.
Despite periodic fluctuations in asset values, donors in the older age range will continue to make their estate plans. Many will continue to experience the desire to “give something back” through charitable bequests and similar gifts. As retirement plan assets comprise ever larger percentages of assets of older Americans, it is important to keep reminding such persons that “bequests” via retirement plans can offer special benefits in the form of increased tax savings when compared to traditional bequests via the will.
Meeting needs of oldest donors
Donors in the over-75 range may have experienced the least decline in asset values and may have benefited the most from increases in bond prices as interest rates have trended down. On the other hand, as donors in this age range may depend most heavily on fixed income investments for their income, lower interest rates may have led to less spendable income, especially for those who have invested in money markets and short-term bond funds. The current environment may thus be the best for charitable gift annuity programs since the early 1990s. Don’t overlook the attractiveness of deferred gift annuities to older donors who are willing to delay income from their annuities for a few years in return for higher rates in later years when they may need the income the most.
For those in their late seventies or older, remember that charitable remainder annuity trusts for the life of one or more persons may be structured with higher rates with relatively little risk to principal. For example, a charitable remainder annuity trust funded with $100,000 in assets can pay a rate of 10% for 10 years with an expected remainder in the range of $50,000. This might be a very attractive way for an older person to structure a significant gift while returning income equal to the entire $100,000 over a 10-year period along with an immediate income tax deduction of approximately $30,000.
As in the case of those in younger age ranges, estate planning will continue unbated by those who are increasingly aware of their mortality. Bequests and similar gifts are typically made by those in their late seventies who die in their early to mid-eighties. Successful programs will continue to take steps to assure that their organizations are top of mind when such persons are working with their advisors to make what may be their final estate plans.
An abundance of cash
Regardless of age, many donors now have more cash than in recent years as they have shifted a portion of their assets out of more volatile stocks and into investments that are more liquid.
For the wealthy, certain plans may prove more attractive under these circumstances. Charitable lead trusts, for example, may hold increased attractiveness with discount rates under 7%. For those who have significant amounts of cash they would like to pass to loved ones tax-free and who also have sufficient income from other sources, lead trusts can be a wonderful way to leave assets to others while making a charitable gift.
Donors with significant amounts of cash may also be encouraged to satisfy outstanding pledges with gifts that would be subject to a 50% of income limitation rather than the more restrictive 30% limitation for gifts of appreciated assets.
Gifts for all seasons
Planned gift arrangements are amazingly flexible vehicles. Plans that were appropriate in recent years may lose some attractiveness while others that may have been “dormant” of late may come to the fore. A little time spent today adjusting our thinking, and our approaches to donors and their advisors, will, as in the past, pay tremendous dividends in increased gift income both now — and in future years.