Posted January 1st, 2000

Mission Impossible? Planned Giving Results and Projection

Editor’s note: This is the final article in a series which began in June 1999 that has focused on a number of common myths regarding planned gift development. Previous articles are available in the Give & Take archives here on this site.

A question we commonly hear is the following: “My management and board don’t believe it is really possible to project and budget for planned gift income, but are nevertheless asking for detailed income and expense projections. Is there any way to reconcile this?”

This is an interesting and challenging question and one that is at the very core of planning, implementing, and perfecting successful planned gift development programs.

Expectations abound

Those in the nonprofit arena are bombarded on a daily basis with news regarding the upcoming transfer of wealth in America and the impact this may have on future support of charitable endeavors. No one seems to question the amount and timing of these projections, and many organizations are launching out in pursuit of this “pot of gold” with no question that it is there. But when it comes to the details of budgeting for particular programs, many boards and nonprofit managers hesitate to proceed with confidence to implement the various strategies that will assure they receive their fair share of the transfer.

In this article, we will examine a final myth—the myth that planned gifts are unpredictable and it is virtually impossible to make reliable income and expense projections. This myth is the root cause for many programs not receiving their share of bequests and other planned gift income.

Skepticism is healthy

A certain amount of skepticism can be healthy when projecting income and expenses in planned giving. Take, for example, recently released projections by a Boston College report of a coming wealth transfer of up to $136 trillion over the next 55 years. Authors of this report estimate that nonprofits will receive from $6 trillion to $25 trillion in bequests over the next 55 years. These are exciting numbers indeed given the fact that 1998 bequest income was $14 billion according to Giving USA estimates, a rate that would yield $770 billion, or less than $1 trillion, if it continues over the next 55 years.

While experts may differ on the exact amount, most agree that we appear to be poised for incredible growth in planned gift income in coming years. When it comes to budgeting for efforts to encourage these results, however, how do we translate this potential into budget dollars available to mount programs designed to encourage these results on an individual program level?

The status quo approach

What many organizations and institutions have done historically is simply make relatively small upward or downward adjustments in planned giving program budgets on an annual basis, with these amounts typically driven by salary and marketing costs for the existing scale of the program, with little or no regard to past performance or future potential. This approach will be increasingly dangerous for those who wish to participate in the coming boom in bequests and other planned gifts.

In other cases, managers of development programs with multiple responsibilities and pressing needs for current funds will sometimes conclude that investments in planned gift development are speculative and will not yield to a cost benefit analysis, and as a consequence fail to act and do little or nothing at all to encourage planned gifts. As a result, these organizations often receive little, nothing, or only sporadic “over the transom” planned giving receipts.

The roots of the myth

Recalling the previous seven myths examined in this series of articles, the belief that there is no way to prudently project income and budget expenses for planned giving can be seen as a natural conclusion reached in large part as result of embracing the earlier myths summarized below:

  • Planned giving is a recent phenomenon (June 1999)
  • Most persons who make planned gifts are wealthy (July 1999)
  • Planned gifts are primarily motivated by tax incentives (August 1999)
  • Irrevocable gifts are the key to success (September 1999)
  • Planned gifts take forever to yield results (October 1999)
  • All planned gifts are valuable (November 1999)
  • Full-time staff is necessary for planned gift success (December 1999)

Here is a summary of the alternative realities discussed in the above articles:

  • Planned giving has been a major source of nonprofit funding for centuries
  • The majority of planned gifts come from middle-income individuals
  • Tax incentives are only one of a number of powerful motivations
  • The bulk of planned gifts come from revocable gifts such as bequests
  • Planned gift programs can yield increased income for charitable use in as short a time period as three to five years
  • Many gifts that appear valuable on their face may conceal hidden costs
  • Full-time staff is optimal but is not necessary for success in many smaller organizations and start-up programs

We believe the key to budgeting successfully for planned gift development efforts is to translate the realities underlying planned giving mythology into concrete action, while avoiding pitfalls based on false assumptions and the biases they create.

Avoiding pitfalls

For example, because irrevocable gifts such as charitable remainder trusts and gift annuities appear certain and their value readily ascertainable, inordinate amounts of staff and other resources are sometimes devoted to this funding source.

Consider the following: According to the IRS, there are now some 85,000 charitable remainder trusts in existence that hold a total of $62 billion in assets. The average age of persons who enter into charitable remainder trusts is early 70s with perhaps a 15-year life expectancy. For this reason, much of the $62 billion currently held in trust will not materialize as spendable revenue for a number of years. In contrast, keep in mind the fact that every 4.5 years, charitable bequests ($14 billion per year) provide actual dollars in hand equal to the entire amount of assets currently in charitable remainder trusts. It should be baffling, therefore, to consider that many programs devote the majority of their funds to encouraging charitable remainder trusts and other irrevocable agreements and little or nothing on development of bequests and other revocable gifts.

Prudent budgeting alternatives

One of the best places to begin in the process of projecting income from planned gifts, and the proper budget to encourage them, is with current production.
Irrevocable gifts—total the face value of all trusts, gift annuities, and other irrevocable gifts for the past five years in one column and the present value of those gifts (use charitable income tax deduction amount if no other present value is available) in another column. Determine a dollar figure equal to 10% of the average present value amount over the five-year period.

Revocable gifts—next total the amount of income from bequests and other revocable gifts that have matured in the past five years. Average that amount and determine a dollar figure equal to 8% of the average receipts total.

In our experience, the amount arrived at by adding together the figures that result from the above exercise should be sufficient to maintain and grow an existing program.

The percentages used above are estimates based on the experience of many programs that have enjoyed success over a long period of time. Newer programs (those that have been active for less than five years) must often spend a somewhat higher percentage for a period of up to ten years from the beginning of the program.
An advantage of the above approach is that the budget becomes self-regulating and will only grow over time as sustained measurable results are achieved. This approach can also be helpful in justifying the expansion of a successful program that is underfunded or in redirecting resources in under performing programs that may have been overfunded to a degree in the past.

Another approach for some organizations is to determine the maximum of income possible from the program and begin spending 6 or 7% of that amount immediately. This will typically result in larger initial expenditures but much more rapid growth in the program. The challenge in this approach comes in accurately determining the potential. Large programs with reliable information regarding number of donors, time on file, age distribution, average number of bequests and other gifts each year, size of gifts, number of expectancies, and other factors can frequently project total income potential and actual income to be received within a few percentage points of accuracy five years or more in advance. Most organizations do not, unfortunately, have the information or expertise available to accomplish that level of planning, so a formula based on actual production in the past such as the one described above is usually more appropriate.

Budget for new programs

What if there is little or no past history of either irrevocable or revocable planned gifts? The first step is to attempt to determine why. In some cases it is due to a limited natural constituency and a program on any scale may therefore be a dubious undertaking at best. Consider the case of a university founded in 1975. The oldest alumni may still be under 50 years of age. One would expect to see little or no planned gift activity from among the alumni base, at least insofar as bequests and other gifts that mature at the death of an individual. On the other hand, an organization with 40% of its constituency over the age of 70 may have a low level of results due to partial or total neglect of the program over a period of time.

Is there a rule of thumb for budgeting for a new program with little reliable past performance data? One approach in such a case is to determine the cost of a basic marketing effort to persons who would qualify as long-term donors (three years or more) over a particular age, typically 65 or 70. Use a cost factor of between $2 and $3 per qualifying donor to determine the cost of a basic marketing effort. Then commit enough staff time to follow up on expected interest as a result of such marketing efforts.

Follow the lead of others

The above suggestions are just that—places to begin in the budgeting process. After attempting to arrive at an appropriate budget internally, contact organizations that you admire and have reason to believe are successful in planned gift development. Ask them how they determine their current budgets and how they have grown over time. Choose organizations that are similar in size and geographic scope to your own. Use this information as a reality check for your plans.

When presenting your budget for approval by your senior management or volunteer leadership, begin by explaining the potential for planned gifts in America overall. Then give examples of comparable organizations that are experiencing success in this area that exceeds your own. Then describe those programs’ staffing and marketing budgets. Finally present your own plan and explain that it has been rooted in examination of best practices of others and in a realistic assessment of potential and proper expenditure levels that will be necessary to achieve the results that are realistic for your organization.

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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