Posted December 1st, 2004

Philanthropy and the Next Four Years

Before the November 2 elections, national polls were too close to accurately predict who our next President would be. All Americans—individuals, corporations, and nonprofits alike—had to contemplate both possibilities and consider how a Bush or Kerry presidency would affect their particular interests.

From a nonprofit’s point of view, either outcome might have presented new fund-raising opportunities. A Kerry presidency may have led to a rollback of various tax cuts on the wealthy, which would, in turn, have reduced the cost of charitable gifts. A second Bush Ad-ministration is now promising additional tax cuts and tax code simplifications, which could increase the after-tax cost of making charitable gifts but would, according to some, provide a stimulus to giving by increasing the disposable income and asset base of wealthy Americans.

In any event, many Americans, including those who make significant charitable gifts, felt that their personal financial future was in the balance prior to the election and may have been hesitant to make substantial gifts this year until November 2 was behind them.

Now that the election is over, charitable organizations and those who represent them need to regroup and refocus their efforts as well. The guesswork is over, and nonprofits must now determine how a second Bush term may affect their fund-raising efforts in coming years.

What to do now

The first step many fundraisers will want to take now is to rethink plans for the remaining weeks of 2004. Review the following “to do” list to see what might apply to your programs:

  • If early fall appeals have not met your goals, consider a post-election reminder to donors who have given in previous years but not yet this year.
  • Review all pending major and planned gift proposals and determine if additional follow-up may be in order now that the uncertainty surrounding the election is behind us.
  • Consider contacting prior gift annuity, pooled income fund, and charitable unitrust donors to see if they would like to make an additional gift before the end-of-the-year tax deadline.
  • If stock market values remain at or near their highs for the year, consider reminding those donors who have given stock in the past about the advantages of giving appreciated securities.
  • Consider making special arrangements to make sure that knowledgeable staff is available to assist donors during the holiday season.

These and other steps can help assure the best possible results for your charitable giving efforts this year-end.

Looking to the future

Next, review your overall plans for the next four years. What is the fund-raising environment likely to be? Will the economic recovery continue or falter? Will tax cuts be repealed or further increased? What are the prospects for the CARE Act and other legislation that is favorable for charitable giving?

President Bush has pledged that in his second term the war on terrorism and America’s overseas military commitments will remain top priorities. The President has also indicated that other initiatives such as taking steps to place social security on a sound footing will also be high on his agenda.

Meanwhile, the federal deficit is growing while the economy continues to show signs of a relatively weak recovery. Slow-to-moderate economic growth is predicted for the next four years. As a result, coming years may present special challenges for capital campaigns and other major gift development efforts.

There is also good economic news for fundraisers, however. A new release by the Joint Economic Committee reports that the net household wealth has climbed to $45.9 trillion, an all-time record. But low interest rates and relatively low returns on stock market investments may leave many prospective donors “asset rich” but “income poor.”

Fundraisers may thus find that gifts that allow donors to increase income for life or another period of time may increasingly appeal to an aging donor population looking to make gifts in today’s environment. In fact, history shows that charitable remainder trusts, bequests, and other planned gifts tend to increase in importance during difficult economic times. (For more on this topic, read Robert Sharpe’s 2002 article “Fund Raising in Uncertain Times,” available at www.sharpenet.com/resources/.)

Factoring in tax changes

In the wake of President Bush’s re-election, the defeat of Senator Daschle, and the increase in Republican majorities in Congress, many wealthy per-sons may now believe more strongly that the federal estate tax will, in fact, be permanently repealed in 2010 as scheduled. The next increase in estate tax relief is scheduled to take effect in 2006, raising the exemption level to $2 million and reducing the maximum tax rate to 46%. This has the effect of exempting a married couple with $4 million in assets from the estate tax. The Congressional Budget Office has predicted minimal reductions in gifts to charity at that level, but has projected significant reductions if the process of estate tax repeal continues and exempts larger estates over time.

For donors who are interested in leveraging tax benefits, the possible repeal of the estate tax may serve to increase interest in the income and capital gains tax benefits associated with gift annuities, charitable trusts, and other gifts completed during lifetime in which the charity benefits at the end of a predetermined period of time or at the death of the donor. As a result, it may be wise to increase planned gift marketing efforts aimed at encouraging such gifts with the “Silent” and “Boomer” generations, who are rapidly approaching the age at which these gifts are especially appealing.

Also on the Bush agenda is a simplification of the federal income tax code. Vice President Cheney and others are proponents of a flat income tax with no deductions, perhaps coupled with some sort of national sales tax. The President, Treasury Secretary Snow, and others appear to support a more moderate approach including taking steps to eliminate many tax “loopholes” for individuals and corporations while preserving time-honored deductions for charitable gifts and mortgage interest. In the past, this approach has been dubbed the “McTax.”

Whatever the outcome, this topic is likely to be the subject of lively debate over the next few years and may serve to render irrelevant discussions of the CARE Act or other previously proposed charitable legislation. The American Jobs Creation Act of 2004 took steps to restrict certain types of charitable gifts, resulting in savings to offset other tax incentives in that bill. As a consequence the CARE Act may be more difficult to pass, as the savings that would have helped pay for it may now have been used elsewhere. In any event, if the Administration is committed to more extensive tax reform, it would appear unlikely that it will lend support to any bill that only serves to further modify the current system that it wishes to fundamentally change or replace.

At the very least, the Bush administration is expected to push to make previously scheduled tax cuts permanent and possibly even accelerate the phase-in. Regardless of the outcome of current efforts to modify the tax code, keep in mind that Americans generously funded charities long before income, gift, and estate taxes were introduced in the early years of the twentieth century. The key is to focus on areas where tax benefits continue to exist while the debate about the future is played out.

Continued demographic shifts

In addition to monitoring economic conditions and legislative trends, gift planners will also want to keep an eye on the country’s demographics. The World War II generation will become less of a factor during a second Bush administration, as this age group continues to pass away in record numbers. Meanwhile, 10,000 baby boomers are turning 50 every day; the oldest will celebrate their sixtieth birthdays in just two years. Fund-raising plans should be designed to encourage planned gifts from the “Greatest Generation,” especially bequests, while also beginning to capture the opportunities presented by the Silent Generation (born 1930 to 1944) and the Baby Boomers (born 1945-1964).

Despite shrinking numbers, the Greatest Generation will continue to be the largest source of planned gifts in the near term; proposed tax changes for the future are less likely to effect their plans. At the same time, those born between 1930 and 1944, the Silent Generation, have reached the ages of 60 to 74. They are now at a critical time in their donor lifecycle and can be divided between planned and major gift prospect pools. Keep in mind that the oldest among this group have a 13-year life expectancy and the youngest some 25 years, so it is important to emphasize gifts that will come to fruition in the near term—prior to the death of the donor when possible. Remember too that this generation is smaller than the one that preceded it, or the one that follows, so it is especially important to seek out and serve as many as possible in this group.

While Baby Boomers are now entering their prime earning years and will be inheriting significant sums from their parents in some cases, many have serious concerns about the economy, health care costs, and saving for retirement. It is likely that they will develop their own approaches to planned and major giving in coming years, and they may respond very differently than their parents or grandparents. The oldest of the Baby Boomers now enjoy a 25-year life expectancy and may still be burdened with educational expenses, care for their parents, and other needs that would interfere with the desire to make a significant gift. For these reasons, it is even more important to help them make gifts that are delayed for as short a time as possible while they temporarily direct funds to meet these needs.

Looking ahead

The bottom line may well be that charities that are performing essential work efficiently and communicate this fact well to their constituencies will do better over the next four years than those who do not. Those assigned to promote planned and major gifts should continue to focus marketing efforts on the appropriate segments of their market as determined by age, wealth, giving history, and other factors.

Changes in national leadership come and go. History tells us, however, that Americans are a very generous people and continue to make charitable gifts regardless of the political party in power or fluctuations in the economy. That being said, in times of uncertainty and change, it is more important than ever to help donors make gifts of the right property at the right time in ways that help them satisfy what could otherwise appear to be insurmountable challenges to making those gifts.

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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