Posted March 1st, 2010

Recession Remainder Blues

In recessionary times, bequests and other planned gifts that involve a remainder interest rather than an immediate gift tend to be especially appealing. Because uncertainty in investment and real estate market values can make donors reluctant to give, it is not uncommon during economic downturns for bequests and other gifts distributed at death to constitute a larger percentage of gifts received by charities.

Bequests remain appealing

For example, it was reported last year that 7 of the 10 largest gifts in America in 2008 came from estates. Another recent report from The Chronicle of Philanthropy reveals that roughly 20% of the 50 most substantial gifts in 2009 were bequests.

While decisions to make larger immediate gifts may be derailed by economic turmoil and uncertainty, bequest maturities are more constant, owing to the fact that people continue to pass away in accordance with actuarial tables regardless of prevailing economic conditions. In addition, some gifts that might have been made on an outright basis in better times may instead be completed in the form of a bequest.

Economic impact

That being said, however, given the depth and length of the current recession, we may now be seeing an impact on the amount and timing of bequests and other planned gift distributions. According to some reports, the “affluent market” has shrunk more than 25% since the start of the recession. In the wake of declining values for most asset classes and relatively low earnings from many types of investments, the net worth of many individuals—whether of average means or wealthy—has diminished somewhat, which in turn can affect the size of distributions from decedents’ estates over time.

The estate settlement process may also be prolonged as personal representatives hope for real estate and other assets to return to previous values. In some cases, executors worried by falling market values may have felt it prudent to quickly convert an estate’s assets to cash to avoid sustaining further losses.

Unfortunately, these estates in many cases missed market advances that subsequently occurred during the period of their administration. The estates of persons who passed away in late 2008 or early to mid-2009 may have been particularly vulnerable.

While market forces may have a limited effect on bequests for a specific amount, they have in some cases had a significant impact on the value of residuary estates and/or estates that included real estate or securities. In one case, for example, several charities were left the remainder of an estate that included a multi-million dollar home. The value of the home has since declined by at least $2 million, causing an estimated $500,000 decline in the bequest income of four organizations.

What it all means

Experience indicates that nonprofits should expect and not be surprised by a reduction in the amount of bequests and other gifts distributed at death in the current environment. The estates of those who died in the midst of market lows a year ago—where assets were liquidated at that time—may constitute a large portion of bequests being received in coming months. And bequests involving real estate may be particularly affected.

The good news is that stock market values have rebounded by about 50% in the past year. The value of assets comprising estates left to charity in the form of bequests will have shared in that rebound prior to the decedent’s passing away in many cases, meaning that we may soon see an upturn in the value of distributions from estates as the restoration of asset values begins to work its way through the estate settlement process.

In any event, now may be the time to monitor estate distributions more diligently than ever. Experienced programs have found that the key to maximizing bequest distributions and receiving them in a more timely manner in this environment is to stay on top of the process, while letting executors know that you realize the challenges they may be facing and are ready to assist them in any way possible.

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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