Posted January 1st, 2005

Planning Matters

Most gift planners are very aware of the importance of charitable bequests, yet even the most experienced fundraisers often have misconceptions or questions about bequests. Are bequests the simplest or most complicated planned gift? Can charitable gifts by wills be encouraged or influenced in a significant way? What can be expected from the great wealth transfer? What will the impact of the elimination of the estate tax be on bequests? Who is most likely to arrange a gift by will? Are bequests always the best planned gift option? What other alternatives to the charitable bequest might a donor consider? This month’s “Planning Matters” is devoted to answering these and other questions that many gift planners have concerning charitable bequests.

Question: Are charitable bequests the easiest or simplest way to arrange a planned gift?

Answer: Contrary to popular belief, there are many planned gifts that are easier and simpler to arrange than charitable bequests. Beneficiary designations of life insurance and retirement accounts are two examples. “Pay on Death” or “Transfer on Death” arrangements for bank and brokerage accounts are other options. Gift annuity and pooled income fund contributions are two more ways to give that do not normally involve as much complexity as making or revising a will. None of these gifts need involve legal fees or appointments with attorneys, and all may be completed by telephone and mail in the privacy of the donor’s home.

Question: Don’t most people already have their will or estate plans in place?

Answer: Not necessarily. There have been published reports that over half of adults do not have a will or other estate plans in place. According to a 2003 AARP survey, over 40% of Americans over the age of 45 do not have a will. This represents a tremendous opportunity for charities as these persons begin to make their plans. Also, gift, estate, and financial plans need to be reviewed and updated as an individual’s circumstances change, so tremendous opportunities exist as others revise and update their plans.

Question: Is it really possible to influence charitable bequests in a significant fashion?

Answer: That would certainly appear to be the case. According to surveys, the majority of wealthy Americans intend to include charitable provisions in their estate plans, yet typically only 17%-20% of estate tax returns claim a charitable deduction. While Giving USA estimates usually report charitable bequests as 7%-9% of total giving, many charities with well-established marketing programs are reporting figures three times that amount in the 21%-27% range or more, indicating that it is in fact possible to influence this method of giving over time.

Question: Can we expect a “windfall” of bequests because of the much-anticipated $41 trillion estate transfer?

Answer: Remember that the Boston College study involved projected transfers over a 55-year period of time. While charitable bequests should grow over time in the future (as they have done in the past), the growth is likely to be somewhat gradual, with the largest transfers coming when the members of the Baby Boom generation make their final contributions via their wills and other estate plans.

Question: What about the impact of the elimination of the estate tax? Won’t that cause massive reductions in bequests and charitable giving?

Answer: While no one can say for sure, there are predictions from the Congressional Budget Office that charitable bequests and giving generally may be negatively impacted by the total repeal of the estate tax. Meanwhile, the initial impact of the first stages of estate tax relief show no signs of these reductions. According to the Joint Economic Committee, charitable bequests actually increased in 2002 after the exemption equivalent was raised to $1 million. Remember, too, that the estate tax was effectively repealed for most persons under the terms of the Economic Recovery Tax Act of 1981, which ushered in the original $600,000 exemption and introduced an unlimited marital deduction. Since then charitable bequests have grown from $3.6 billion to $21.6 billion in 2003.

Question: I don’t understand: without a charitable deduction, won’t people simply stop making charitable bequests?

Answer: Things are not that simple. Most people that make charitable bequests have a variety of concerns besides taxes. As far as tax benefits go, remember that a deduction is not the same thing as a credit and that there is still a cost for the non-charitable beneficiaries. In other words, the heirs will receive more if there is no charitable bequest. This is true whether the estate is a taxable or non-taxable estate. Add to that the fact that the vast majority of gifts received via will today come from non-taxable estates.

Question: Can you give me an example?

Answer: Certainly. Let’s consider a $100,000 charitable bequest from a person with an estate of less than $1.5 million and one with an estate of more than $10 million. In the non-taxable estate, the cost to the non-charitable beneficiaries is $100,000. With the larger estate, the cost to the heirs is $53,000, assuming a 47% estate tax rate. In other words, if no gift were made the estate tax on $100,000 would be $47,000, leaving just $53,000 for the heirs. Thus, the person with the smaller estate must arguably have more donative intent than the wealthy person because the cost of the bequest to charity is 100% of the amount given rather than 53% of that amount.

Question: Who are the best bequest prospects?

Answer: Within the universe of older long-term donors, certain profiles emerge. Those who never married or had children are one important group. Widowed and divorced persons without children are another. Most programs find that the majority of their bequest donors—and many of their largest bequests—come from women found among the ranks of these two groups.

As we have seen, charitable bequests may not always be the best or simplest choice for donors, but they are and will continue to be the number-one source of planned gift revenue for the charitable sector for years to come. Financial development executives who are concerned about the possible impact of the repeal of the estate tax may wish to try to replace lost bequest revenue by taking steps now to increase the number of bequest expectancies and, in turn, future maturities. This may mean expanding bequest marketing efforts to a broader portion of your donor file, or periodically exposing your entire file to the bequest concept. (See Questions & Answers About Wills and Bequests at www.sharpenet.com/qa/ for sample bequest mass-marketing materials.)

Sophisticated gift planners will often use bequest marketing as a way of discovering donors of all ages with the highest level of donative intent and as a “door-opener” to discussion of a broader range of gift options which may ultimately better meet the prospective donor’s needs and increase the likelihood that a gift will be completed. Donors who were considering a bequest may find that another simple remainder via an insurance policy, retirement plan, or saving or brokerage account is easier to arrange, or that a trust or some other type of split-interest arrangement provides additional benefits.

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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