In early April, the National Committee on Planned Giving (NCPG) released its “Valuation Standards for Charitable Planned Gifts.” The suggested standards represent the culmination of over three years of work by a twenty-person task force representing both the charitable community and financial services providers whose work includes determining the value of planned gifts.
The standards are intended to augment other practices that are currently used in accounting for planned gifts, including U.S. Treasury Department formulas for determining the amount of charitable deductions, Financial Accounting Standards Board (FASB) guide-lines for reporting gifts on nonprofit financial statements, and methods for counting gifts in the context of capital campaigns furnished by the Council for Advancement and Support of Education (CASE).
As stated by Jeff Comfort, director of planned giving at Georgetown University and chair of the task force in the press release published by NCPG, “These methodologies are valid and useful for their intended purposes. However, none are intended to estimate the ultimate value of a planned gift to the charity that will receive it. In many cases, the accepted methods for accounting, counting, and determining the charitable deduction substantially underestimate the value of planned gifts. The valuation standards help charitable organizations and donors understand the value of a planned gift in terms of its present purchasing power. That present value is reached by considering real-world data, including the standards of the Prudent Investor Rule and historical indices of investment performance and inflation.”
How they work
The NCPG standards are straightforward in their methodology yet flexible enough to reflect the different experiences of distinct charitable entities. The standards start with the amount used to fund a gift vehicle and consider the amount and nature of the payments to be made to donors. They then reflect the amount expect-ed to be ultimately received by the charity in light of anticipated investment experience based on historical norms, and finally discount that amount based on lost purchasing power during the period of time until the gift comes to fruition.
This process is different from the methodology underlying the determination of the charitable deduction for a gift. In the case of gift annuities, for example, the charitable deduction amounts to the difference between what a donor gave and the present value of the payments retained by the annuitant. This method does not, and is not intended to, reflect the amount it is anticipated will be received by the charity.
Take the case of a $10,000 gift annuity paying 7.1% for the life of a 75-year-old annuitant. Note that the charitable deduction varies widely depending on the applicable federal midterm rate (AFMR) in effect at the time the annuity is completed. The discount rates used in the chart below, which vary by as much as four percentage points, have each been a monthly discount rate in one of the months since March 2000.
Under the NCPG gift valuation standards procedure, the value to the charity is determined by first calculating the amount the charity can expect to receive. If the charity pays 7.1% of the amount used to fund the gift annuity, or $710, each year for the 12.4-year life expectancy of the annuitant and earns a net after expenses of 5% (the amount assumed in determining the gift annuity rate), the charity can expect some $6,657 to remain at the death of the annuitant.
The NCPG task force concluded that unless the charity is offered a choice between the gift annuity and a gift of cash, the “opportunity cost” to the charity while it awaits receipt of the remainder from the gift annuity is the loss of purchasing power of those funds. If a long-term inflation rate average of 3.4% is used to discount the $6,657 for loss of purchasing power, the current purchasing power of the anticipated remainder is $5,632. Note that this amount is from 5% to 36% higher than the charitable deductions listed above, which fluctuate widely based on changes in the AFMR rate.
The charitable deduction is designed to place a value on the amount given by a donor using interest rates in effect during that immediate time period. However, the performance over time of charitable gift annuity funds, remainder trusts, and similar gifts—and therefore the real long-term value—will depend on the longer-term performance of investments in areas other than government securities and other factors. The NCPG standards thus recommend the use of investment assumptions that are based on longer time horizons and discount rates that are based on long-term inflation rates to more realistically reflect the charity’s loss of purchasing power. The amount reported under the NCPG standards will thus not vary as much during a given five-year time period as charitable deduction formulas that use federal midterm rates.
It should be noted that the earnings assumptions, discount rates, and mortality tables are intended only as suggestions based on broadly based experience. Charities are encouraged, where they deem it appropriate, to substitute earnings assumptions, inflation rates, and other variables that are more in keeping with their unique experience. The NCPG will periodically issue updated standard rates of earnings and inflation based on its recalculation of trends in those rates over time.
The NCPG standards also address the valuation of revocable gifts such as bequest commitments, charitable remainder trusts with revocable remainders, life insurance gifts, and other gifts that allow a donor to change his or her mind prior to death. These guidelines are intended for use only for internal planning and evaluation purposes. They offer suggestions for calculating the anticipated value of those gifts, discounting them to cur-rent purchasing power, and then applying a probability factor designed to estimate the probability of receipt of the gift given its revocable nature. This section of the standards takes a unique approach to this process and one that is certain to be of interest to organizations that discover large numbers of new bequest expectancies and other revocable gifts each year.
The new NCPG valuation standards should prove of use to many organizations and institutions as they seek to determine the effectiveness of their funding pro-grams. According to the NCPG, they are expected to be useful in the following ways:
- Evaluating costs and benefits of planned gift fund raising.
- Determining the financial effectiveness of an organization’s current investment in gift planning.
- Allocating appropriate resources to a gift planning program.
- Setting planned gift fund-raising expectations within a comprehensive fund-raising program or campaign.
- Assessing the effect of certain variables (e.g. term of the gift, investment strategy) on the ultimate value of the gift to the organization.
For more information and to read the complete Valuation Standards, visit www.ncpg.org.