The Donor Centered Approach

From our experience, those who enjoy the greatest success in major and planned gift development succeed in part because they spend the time necessary to learn and understand not only the “who” and “why” of the gift, but also the basics of the “what,” “when” and “how” of the giving process.

This can be easier said than done, however. Given all the elements that can converge in the process of effectively planning a charitable gift, even the most experienced fundraiser can easily become overwhelmed. And if you are organized with separate major gifts and planned giving departments, it makes it that much more difficult, as each department may naturally be focusing on their own area instead of providing a holistic focus based on the donor’s wishes.

The Focus on the Donor

To help organize our thinking about the gift planning process, we encourage a “donor-centered” approach that uses the Sharpe Gift Planning Pyramid TM as the framework through which to view the art of helping people give most effectively. It’s important that we think of charitable gift planning as a rational process. Every gift works its way along a path through the pyramid.

Note that the donor—not the institution—is at the top of the pyramid. It’s a good idea to have various types of programs designed to produce funds for different needs at different times and make available services that help in the process of planning your donors’ gifts. The most successful programs, however, are those that stay focused on the giving process from the donor’s perspective.

To start, imagine yourself at the top of the pyramid and the reactions you might have as you perceive numerous initiatives working their way up the pyramid toward you. Put yourself in your donor’s shoes. The key is to make all the various ways of making gifts available and help the donor choose the most appropriate way to make a gift at a given time in life.

It can be less than productive to think of “planned gifts” as deferred gifts, property gifts, endowment gifts, tax-oriented gifts or as taking on the characteristics of any of the numerous outcomes at various decision points in the planning process. Planning charitable gifts is a process. The planned gift is the outcome from the institutional perspective. Gift planning describes the process from the perspective of the donor.

Step 1: Sizing Up the Gift

Donor Centered - Step 1

All gifts can be broken into two broad categories: major gifts and other gifts. For most organizations and institutions, the vast majority of gifts will fall into the “other” category, with a relatively small number of major gifts each year often comprising a large percentage of overall funding.  The first step for a donor, after deciding to make a gift, is to consider whether he or she would like to make a large gift or a smaller gift. These terms are, of course, relative to the donor’s means, with some considering $1,000 to be a major gift while others see that as a relatively modest gift.

Step 2: Determining the Timing

Donor Centered - Step 2

The next step in the process is timing. Some who are capable of forming the donative intent to make a major gift are able to complete the gift right away. Others may wish to make a larger gift but, because of various financial circumstances, do not believe they are in a position to make the gift immediately. In that case, a donor may decide to defer the gift for a period of time.

A gift such as a pledge to a campaign over a number of years may be deferred for a short time or it may be deferred for years or even the lifetime of one or more persons (in the case of a bequest pledge or gift with retained income for life).

Smaller gifts may also be deferred. An example might be a donor who, when asked by their attorney if they have charitable interests, replies that they would like to divide the remainder of their estate, if any, among charitable interests after first providing for loved ones. In that case, the donor may intend for a relatively small portion of their estate to be eventually devoted to charitable use. Another example might be a gift annuity of a relatively small amount.

Step 3 – Evaluating Tax Implications

Donor Centered - Step 3

After deciding how much to give and when, it can be wise for a donor to consider the tax consequences of the gift.

Note that larger and smaller gifts, whether current or deferred, may or may not be made in light of tax considerations. Consider the case of a donor with assets of $10 million and an adjusted gross income (AGI) of $300,000 who made a $250,000 gift of appreciated securities to a charitable interest last year. That donor would have been allowed to deduct just $90,000 last year (due to the 30 percent of AGI limitation for gifts of appreciated property). The donor would be able to carry over and deduct another $90,000 this year, leaving $70,000 to carry over and deduct next year.

Now suppose this donor has also made cash gifts this year that bring him up to the total of 50 percent of AGI limitation. If he were driven strictly by tax considerations when considering whether to make an additional gift of any size, this donor would not make it because it would not be deductible and would have to be made from after-tax income. Experienced fundraisers know that donors will sometimes make a gift regardless of their ability to deduct it. A wealthy donor may have a large amount of tax-exempt income that is not considered part of his or her AGI and will use cash from this source to make a gift. Not reporting the income and giving it away with no tax deduction is the equivalent for tax purposes of reporting the income and then taking a charitable deduction.

Most donors of small amounts make charitable gifts that do not exceed the amount of the standard deduction and are not deductible for income tax purposes. This is why tax considerations do not come into play for many smaller gifts.

Overemphasizing tax savings to those who are not motivated by this aspect of charitable giving for whatever reason can be a serious mistake. Ignoring tax considerations when dealing with donors or their advisors for whom this factor is crucial can be an equally damaging error. In fact, after consideration of tax savings, some donors may actually decide to increase the size of the gift they had planned to make. Maintaining perspective and balance is key when addressing the role of taxation in charitable giving.

Step 4 – Determining What to Give

Donor Centered - Step 4

Tax and other financial considerations can also help a donor decide the type of property used to make the gift. Once a donor has decided to make a large or small gift, whether current or deferred, and they have considered the tax ramifications, the donor must then decide whether to give cash or other property.

Because wealthy individuals tend to have their assets invested in non-cash assets, the larger the amount of a gift, with or without tax considerations, the more likely it is the gift will be made in a form other than cash. Where donors are in a position to take advantage of the capital gains tax savings inherent in gifts of appreciated assets, this form of property will often be the gift of choice. In other cases, donors will sell assets that have declined in value, take a capital loss and make their gift in the form of cash that is subject to the 50 percent of AGI limitation.

Avoid the common mistake of thinking donors always make gifts of appreciated property for tax savings reasons alone. Imagine that a donor owns 20 investment properties worth an average of $500,000 for a total of $10 million. If the donor wanted to make a gift of $500,000, with or without tax considerations, would the donor be more likely to give cash or one of the properties worth $500,000? It would depend, but one can imagine a situation where the donor did not have $500,000 in liquid assets readily available and decided instead to transfer one of the investment properties to satisfy a pledge. In our experience, donors sometimes give what they have, regardless of tax consequences. Most wealthy donors do not become wealthy or stay wealthy by keeping hundreds of thousands or millions of dollars in checking accounts. For this reason, asking for larger gifts is usually the same as asking for a non-cash gift.

Step 5 – Determine Why the Gift is Made

Donor Centered - Full Path

Finally, we come to why people give. Any of the previously described gifts can be for restricted or unrestricted purposes.

The reason for the gift can sometimes affect the timing. For example, a donor who would like to make a large gift for endowment and long-term security of the charitable recipient may be more likely to make a deferred gift than a donor interested in funding an immediate need. On the other hand, a donor interested in funding an urgent mission might also consider a charitable lead trust to fund a pledge of a current gift over time while deferring a gift to family members who may have a longer-term need for the funds. Avoid confusing the why with the what, when, and how of the gift.

Using the Pyramid

Donor Centered - Full Path Highlighted

In terms of sheer numbers, most gifts will work their way down the right side of the Planning Pyramid. They are smaller, current, non-tax-oriented gifts of cash for unrestricted purposes. Contrast this with a larger, current, tax-oriented gift of cash that is restricted for a capital project. Most organizations are more familiar with and better able to work with gifts that travel down one slope of the pyramid or the other.

In an environment characterized in many cases by an aging donor base, investment uncertainty and other challenges, the most successful development efforts in coming years will be those with the capability to navigate the various courses a gift can take through the center of the funding pyramid.

For more information about how to apply this approach in the context of your fund development efforts, contact us.  The Sharpe Seminar “Integrating Major and Planned Gifts” also features a number of sessions that explore case studies and how to use the Planning Pyramid to help discover the best solutions that help meet donors’ needs while fulfilling their philanthropic objectives.

The Correlation Between Digital Marketing and a Reduction in Planned Gifts

Common wisdom is that a planned gift development effort can be expected to begin yielding measurable results in terms of increased income within three to five years. Numerous factors can affect that outcome, and if measurements such as new estate commitments are included, the return can be almost immediate. For purposes of this post, though, I’ll focus on results as measured by actual distributions received from estates.

Statistics compiled from many years of research of thousands of actual estate gifts, received by scores of organizations, indicate the following:

  • The most common time period between the execution of a will that contains a charitable bequest and the donor’s death is one year.
  • 25 percent of bequests nationwide come from those who pass away within one year of executing their final will.
  • Over 50 percent of bequests come from those who pass away within four years of signing their final will, and over 80 percent within 10 years.

These statistics are also borne out by findings in recent studies by Dr. Russell James of Texas Tech University. (Click here for more details in the April 2014 issue of Give & Take).

Over more than 50 years of experience, Sharpe Group has rarely found an organization’s experience to deviate from these norms. If you don’t believe it, check your bequests received over the past few years and compare the date of the execution of the will with the date of the donor’s death.

What’s Happening to Organizations That Overrelied on Digital Marketing Too Soon

When social media started becoming popular in the late 2000s, many organizations jumped on board — focusing on Facebook likes, tweets and email blasts while dramatically decreasing planned gift marketing and stewardship efforts.

At the time, it seemed like a good move, right? Email marketing and social media were the constant topic of conversation in the press, and its costs were much lower than print and other traditional media.

However, the hard data is now showing the results of that decision. Here’s an example of an organization that abruptly switched its primary planned gift marketing from print to online e-marketing beginning in 2005.

Correlation Between Digital Marketing and a Reduction in Major and Planned Gifts

As you can see, bequest income and numbers of realized bequests both dropped by significant amounts within three to five years after traditional marketing was curtailed. Similar results were experienced in the numbers of new gift annuity commitments. This followed a 20-year period of solid growth.

At this organization, bequest donors on average do not make their first gifts to the organization until their mid to late 70s. Unfortunately, this organization did not realize that the average age at the time donors fund gift annuities is 79, and that bequest donors are normally in the same age range when making their final will. (See Dr. James studies referenced above.)

When they switched to email-based marketing in 2005, less than 20 percent of people in that age range were online. Recent Pew Foundation reports reveal that 62 percent of people over age 77 are still not online and only 18% of people over 65 have smart phones. As a result, this organization inadvertently stopped communicating with as many as 80 percent of its prospective planned gift donors!

While this organization increased web traffic from younger people seeking free will planning kits and discovered a number of bequest intentions from younger people with life expectancies of 25 years or longer, this approach had little or no impact on donors over 75 — the majority of whom were not, and are still not, online.

The Damage Will Continue

Unfortunately, it will take another three to five years to arrest the decline and effect a meaningful reversal for this organization. By that time, this program will have experienced 10 years of interruption in growth and approximately $50 million in lost bequest revenue. All to save marketing expenses that would have totaled a miniscule fraction of this amount.

Is this an isolated case? Unfortunately not. Today, online marketing can indeed be a cost-effective way to plant seeds that will bear fruit in decades to come — and a marketing channel not to be ignored — but if you expect it to replace the marketing mediums that are proven to work with the most likely estate gift donors, while receiving the same results, you’re likely to incur a precipitous drop in your bequests and other planned gifts sooner than you might think.

Things may change in future years (as the Baby Boomers and Generation X who are comfortable using online media reach their 70s and 80s), but there’s no denying the hard data today.

The Solution

The organizations with the most successful programs know that it’s vital to keep messages designed to encourage bequests and other planned gifts in front of those donors who are statistically most likely to be making their final wills during a time frame that will result in a reasonable return on investment.

Connect with us if you’d like to understand the other truths that guide the most successful programs, and how to apply them to your program.

This post was excerpted from Mr. Sharpe’s opening presentation “Trends in Planned Giving” at the bi-annual national conference of the American Council on Gift Annuities on April 9, 2014.