Posted June 1st, 1999

The Myths and Realities of Planned Giving

Editor’s Note: This article is the first in a series that will be featured over the next several months in Give & Take. It is the intention of the authors to distill over 100 years of combined experience of Sharpe consultants in working with planned gift development efforts of all types and sizes into a number of articles intended to help new and established programs avoid a number of pitfalls and roadblocks that are based on a collection of misconceptions that have over the years become part of “common knowledge” in the fund-raising arena.

Webster’s dictionary defines Myth as “a traditional story of unknown authorship, ostensibly with an historical basis, but serving to explain some phenomenon of nature, the origin of man, or the customs, institutions, religious rites, etc. of a people.” Over the years, we have observed a number of organizations and institutions that have struggled year after year to enjoy the benefits that can be afforded by planned gifts while unfortunately achieving only intermittent success at best. What are the factors that seem to derail such programs? What sets programs that are consistently successful apart from those that fail or just “get by”? We have observed that many programs that find planned gifts a struggle tend to share some things in common. Their programs tend to be built around one or more common myths. These myths can be summarized as follows:

  • Planned giving is a recent phenomenon on the fund-raising scene and not much can be learned from studying past trends in this area.
  • Most persons who make planned gifts are wealthy.
  • Planned gifts are primarily motivated by tax incentives and those who advise donors in these areas can be relied on to steer donors to waiting charities.
  • Irrevocable trusts and other similar gifts are the key to success in planned giving and other types of gifts should be given lip service, but can’t really be influenced or relied upon.
  • Planned gifts take forever to yield benefits for charity.
  • All planned gifts are valuable.
  •  Full-time staff devoted to planned giving is always necessary for success, regardless of the size of the organization or institution.
  • Planned gift results are unpredictable, making expenses and income for all practical purposes impossible to project and budget for.

While there may be a grain of truth in each of the statements above, they are all for the most part false. Organizations that embrace these myths and use one or more combinations of them as the guide to planning and implementing their charitable gift planning efforts will either never experience meaningful results, or will have sporadic or underperforming efforts.

In this and future articles, we will examine each myth, attempt to determine its origin, determine the extent to which it is based on truth, and then offer positive and realistic recommendations designed to help deal with the relevant issues.

Myth One-“Planned Giving Is New and There Is Not Much Guidance Available”

This myth finds much of its origin in the Tax Reform Act of 1969. As part of that comprehensive tax reform initiative, Congress included a number of very specific provisions that were designed to deal with what were perceived by legislators as abuses of legitimate incentives incorporated in the federal income, gift, and estate tax systems.

Planned giving in the mid-20th century

During 1950s and 60s a number of institutions were broadly marketing to persons outside their natural constituencies what could only be described as tax shelters. Generally the “donors” who availed themselves of these “gift plans” had little or no donative intent toward the institutions that promoted the plans.

These “tax shelter” plans primarily involved complex uses of charitable remainder trusts. They took advantage of the fact that there were no statutory, regulatory, and court determined guidelines governing payout rates, discount rates, how trusts could be invested, how the income would be taxed, how small the charitable benefit could actually be, etc.

In an attempt to limit the abuses it perceived without interfering with the positive uses of charitable estate planning tools, Congress gave us very strictly defined rules governing the pre-existing vehicles we now know as charitable remainder unitrusts, annuity trusts, pooled income funds, charitable lead trusts, and others.

New laws created new niche

It is true that the 1969 law and the myriad of regulations, rulings, and court decisions that interpret and now form the tax laws governing irrevocable trusts, gift annuities, and other so-called “split interest” gifts are relatively new. This complex patchwork of arcane laws made it necessary for a group of tax attorneys, many of whom are now well known gurus in planned giving, to “hit the road” beginning in the early 70s to teach the staff and volunteers serving America’s nonprofits the new rules that governed charitable estate planning.

As a result, many of the persons who entered the field of development in the 1970s would and naturally did assume that planned giving was something new, primarily based on tax law, and a technique that they may or may not wish to append to their programs. These managers often responded by hiring persons who were expected to specialize in understanding and applying the “new” plans put in place by the 1969 tax act. These persons were typically called “Directors of Deferred Giving.” There are still a small handful of persons in America who bear that title, as “Director of Planned Giving” or “Director of Gift Planning” has become more commonly used.

From the early 1970s to today, therefore, many among the leadership of America’s nonprofit community have seen “planned giving” as something new, optional, and in many cases not really a central component of the ongoing development effort.

A brief history of planned giving

The reality could not be further from the truth. Planned gifts are demonstrably as old as Western civilization, and in various forms have long been interwoven in its history. Ancient Greek and Roman philosophers, Aristotle chief among them, wrote extensively on various types of philanthropy. Citizens of Rome established perpetual family foundations that were allowed to receive bequests by the first century A.D. Throughout the medieval period, most social services were performed by the proceeds of rents from land held in charitable trusts, and by the remainders from gift annuities that had been funded for the benefit of the Church.

By the mid-16th century, the Church had accumulated between one-third and one-half of the wealth of England through its fund-raising efforts, most of which were based on gifts via trusts, bequests, and annuities. As an early step in what we now know as the Reformation, Henry VIII enacted what have come to be known as “Mortmain Statutes” which forbade his subjects to leave any more land to the Church in perpetual charitable trusts. As a softening of these statutes, in 1531 a law was passed that allowed persons to place land in trust for the benefit of the Church but only for a maximum of 20 years, at the end of which time the land must return to the family. Then, as now, persons were allowed to voluntarily direct assets for charitable use for a period of time before returning the property to their family. Could this be the origin of what we know today as the charitable lead trust?

When American independence was declared in the late-18th century, our forefathers took the process another step further when they provided for total separation of Church and State, thereby assuring that American society would always include an independent nonprofit sector. From the early days of American society, persons like Harvard, Smithson, and others left generous bequests that built the educational, cultural, religious, and social service agencies that still form the bedrock of our country.

The earliest records of gift annuities in America date to contracts issued by the American Bible Society in 1843. There is evidence of very active planned gift development efforts including bequests, gift annuities, and charitable trusts in the early part of the century, predating the income, estate, and gift tax codes by decades. An article published in The New York Times in 1939 declared that the colleges and universities that raised more money during the Depression than in earlier years did so because of the “dramatic increase” in bequest income during the 1930s while outright gift sources declined. These gifts were the result of active planned gift development efforts in the early years of the century. For example, the American Council on Gift Annuities was founded in 1927 and began the process of recommending prudent gift annuity rate standards that continue to this day.

Planned giving in post war America

American society experienced tremendous upheavals during and in the wake of World War II. It was a time of rapid growth in our society when untold amounts of wealth were created. A new generation of management took the helm of a rapidly expanding nonprofit sector. The economic environment was booming with the majority of the wealth controlled by relatively young veterans who were amassing large amounts of capital. Campaigns for outright gifts to build American hospitals, classrooms, libraries, symphony halls, and other bricks-and-mortar projects became the dominant form of major gift development. In this environment, what we now know as “planned giving” became less central to the funding process and was largely abandoned as a funding source by many American philanthropic institutions.

As we enter a new century, however, new challenges that call for tried and true solutions are re-emerging. The heroic World War II generation, led to a large degree by beneficiaries of the G.I. Bill, is now moving into retirement years and beyond as the wealthiest group of seniors in American history. Their concerns are to assure economic security in later years and pass as much of their wealth as possible to their loved ones. These concerns naturally have an impact on, and can interfere with, the desire to make large outright gifts. Planned gifts hold the answers today, as they have for centuries, to the many dilemmas of older donors as they offer an aging donor population the ability to make substantial gifts while retaining income and other financial benefits for themselves and others for whom they feel economic responsibility.

It is in this context that many are rediscovering “planned giving” as an answer to meeting campaign and other funding goals. While this method of giving may be new to many fundraisers, donors, and their advisors, its roots are old and deep and much can be learned from those who have gone before us.

Planning for success

The coming years will be ones of continued success for many organizations and institutions that cost effectively incorporate gift planning tools as an integrated component in their comprehensive fund development programs. Indeed, all persons who successfully interact with middle-aged and older donors will need to have at least a conversational knowledge and basic understanding of the most popular gift planning vehicles.

For nonprofit entities who persist in regarding planned giving as a new, speculative, untried, optional program, the next two decades will be ones that may hold challenges in a world of mature donors who may be increasingly reluctant to make major philanthropic commitments without considering how they are related to their overall financial and estate plans.

Next month’s myth: “Planned Gift Donors are Usually Wealthy.”

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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