Posted June 1st, 2010

Planning for the Preteen Years

With recent reports that giving in 2010 may be recovering somewhat from the low points of the recession in 2009, it may be time to begin turning our attention to other factors that will increasingly influence the amount and timing of charitable giving in coming years.

We are now entering the second decade of a new century. With the “aughts” behind us, we have reached an important stage—the “preteen years.” Just as 10, 11, and 12-year-olds anticipate their teenage experience, there are certain things we should be aware of in 2010, 2011, and 2012 as we prepare for the remainder of the decade.

Interrelated demographic, economic, and political factors now unfolding will almost certainly have an impact on how we raise the funds that will be vitally important in securing the future financial well-being of America’s nonprofit sector and the services it provides.

Aging of the Baby Boomers

The oldest Baby Boomers are now approaching age 65. Some 80 million Americans will reach this milestone over the next 20 years. The Boomer generation has defined American society in many ways through the years and will now transform the American landscape once again.

By the end of this decade, persons over the age of 60 will, in the aggregate, make up the bulk of the donor population, while the number of donors in their mid-forties to late fifties will be declining.

In light of this demographic shift, fundraisers will increasingly need to consider how to make the process of making gifts—especially larger ones—compatible with donors’ needs to plan for a retirement period of 25 years or longer. Whether we refer to them as deferred gifts, planned gifts, split-interest gifts, or use some other terminology, charitable gift plans that combine financial and philanthropic planning will inevitably assume even greater importance in our fund-raising efforts.

In addressing this challenge—and opportunity—it is vital to consider the costs and benefits of our efforts to encourage more effective charitable gift planning. Simply promoting bequests from those in their fifties and sixties with life expectancies of 20 years or longer can be expected to have little impact on actual funds received in the near term. It is, of course, important to motivate younger persons to consider charitable gifts as part of their estate planning, but it will be much more important to work with younger donors to structure other gifts during lifetime. There are many ways to make gifts other than immediate transfers that feature significant flows of spendable funds for charitable purposes right away or over a relatively short period of time.

Cautious economic optimism

The recent period of economic turmoil is something that most of us hope not to repeat. It appears that the Great Recession may have bottomed out in 2009 and an upswing may have begun. While growth in charitable giving normally follows economic recovery, history reveals that it may take until the “teen years” of this decade to return to the levels of giving last seen in 2007. For instance, while giving in America bottomed out in 1933, pre-Depression giving levels were not reached again until 1937. As recovery proceeds, it is important that we be prepared to help donors “ease” their way back into making larger gifts.

Take the case of a 57-year-old who invested $175,000 in Ford stock for under $2 per share in February of last year. That stock was recently worth over $1 million.

While this donor may be reluctant to make an outright gift of $1 million given current economic uncertainty, he or she may be interested in using the stock to fund a charitable remainder unitrust that would last for a maximum of 20 years and pay 5% of the value of the trust each year after the trustee sells the stock and diversifies the investments on a tax-free basis. The donor would also be entitled to an immediate income tax deduction of over $440,000.

Suppose further that the donor makes a commitment to give the first five years of income to fund a gift that could amount to $250,000 or more. As the donor has not come to rely on the stock as a source of income, this could be a nice way for a middle-aged donor to make a substantial gift in the near term that also helps provide for economic security over the next 20 years. Finally, if economic conditions improve over the next few years, the donor may decide at a future date to waive further income from the trust and allow the trust to terminate early, resulting in what could be an additional gift of $1 million or more depending on the value of the corpus at the time of termination.

This is just one example of how careful planning can result in a substantial gift that may not have occurred if those working with the donor were thinking in terms of a traditional five-year pledge.

Changing political winds

Few observers would have predicted—or believed—that Congress would fail to act and thereby allow the estate tax to be repealed for 2010. Unfortunately, it is now very difficult for wealthy donors and their advisors to plan for future gifts through estates. Those who work in development should watch the news and be prepared to send a message about gifts through estates when Congress finally acts on the estate tax issue. Unfortunately, we may not see certainty in this area of the law until next year following this fall’s election cycle.

Keep in mind, however, that the vast majority of charitable bequests in recent years have been received from non-taxable estates. For this reason, it is important to continue to encourage bequests from the majority of donors who will be expected to continue planning their estates despite tax uncertainty.

We will also be seeing changes in income tax laws in January of 2011 if not sooner, as many of the tax cuts enacted in 2001 are set to expire at the end of 2010. If Congress does not act, higher-income donors will face increases in taxes on capital gains and other income. This will result in additional incentives to make charitable gifts next year, especially gifts of appreciated securities where the increase in both regular and capital gains tax rates will make such gifts an even more attractive alternative to cash gifts.

Health care and social security legislation in coming years could also impact the way larger gifts are planned, so development executives should carefully follow this area as well.

These are just a few of the factors that fundraisers will need to address over the next few years. The much anticipated wealth transfer will be accelerating and will begin to have a greater influence on nonprofit funding as well. To participate in the wealth transfer, however, it will be increasingly important to monitor the macro trends that will inevitably affect the amount and timing of this phenomenon and the extent to which individual nonprofits will participate.

Editor’s note: This article was excerpted from Mr. Sharpe’s keynote address to the Philanthropic Planning Symposium sponsored by the Philanthropic Planning Group of Greater New York on May 26, 2010.

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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