Reserving the Right to Revoke

Revoke what? Revoke the right of another to receive gift annuity or charitable remainder trust (CRT) payments.

The right to revoke has one and only one purpose: to prevent the making of a gift for federal gift tax purposes1. Here’s an example:

The donor, using her own assets, creates a gift annuity that is to provide payments first to the donor for life and second to the donor’s friend for life if the friend survives the donor.

Under the gift annuity agreement, the donor reserves the right to revoke the annuity payable to her friend. Without the right to revoke, the donor would make a gift to her friend for federal gift tax purposes, a gift that would eat into the donor’s so-called “lifetime gift tax exemption.” The right to revoke eliminates this gift because it leaves uncertain during the donor’s life whether the friend will receive annuity payments.

There are a number of issues that can arise in connection with a right to revoke. Click here to download our free white paper “Good Planning with the Right to Revoke” for more information.

by Jon Tidd

 

  1. Sometimes individuals do exercise the right to revoke, for non-tax reasons, usually a falling out with the individual whose annuity payments are revoked, but this is rare.

What Is the Law Concerning Gift Agreements?

“Gift agreement” means here a written agreement between a donor and a charity concerning endowment funds the donor will give to the charity. The typical endowment fund has a specified purpose and a name, most often the donor’s name. Many endowment fund gift agreements also contain a spending rate provision, which spells out how much of an endowment fund and its earnings the charity may spend each year.

So what is the law concerning such gift agreements? The bedrock body of law is a state law that goes by the acronym UPMIFA. UPMIFA stands for Uniform Prudent Management of Institutional Funds Act. Just think of it as UPMIFA. UPMIFA is in force in every state except Pennsylvania. It is fairly uniform from state to state, but some states such as New York have tweaked the basic UPMIFA provisions a bit.

UPMIFA is essentially a body of rules. Some of its rules (for example, as to spending rate) can be overridden by the written gift agreement between donor and charity. Some of its rules can cause problems. What sort of problems? Here’s a real-life example:

  • Donor is interested in making a very large endowment gift to Charity for Purpose X. Donor’s savvy lawyer, however, advises Donor to set up a private foundation instead. Why?
  • Because the lawyer knows that under UPMIFA, if Charity violates the gift agreement sometime down the road by using the fund to support Purpose Y, the only party who will have standing to challenge Charity’s breach of Donor’s gift agreement in court will be the state attorney general.
  • Upon learning this, Donor is aghast. Knowledgeable donors, by the way, have come to learn this without having to be so advised by their lawyers. That’s one reason a lot of endowment money has been diverted into DAFs (Donor Advised Funds).

Click here to download our free white paper “Everything You Need to Know About UPMIFA” for more information.

by Jon Tidd

Relinquishing Life Income Payments: What Are the Issues?

Not infrequently, individuals entitled to receive gift annuity or charitable remainder trust (CRT) payments step forward and say they want to give up the right to receive the payments. They do so typically because they don’t need the income and because they’re just as glad to accelerate a benefit to charity. Sometimes the payout recipient wants to “cash out” by transferring (assigning) his or her right to receive payments to the charity in question in exchange for a lump-sum cash payment.

Is there any problem here? Well, maybe not or maybe. Suppose, for example, the donor set up a CRT under her will that is to make payments to her son for life. Let’s assume the donor did this because her son has various problems, including a problem managing his finances. Can the son now “cash out” by assigning to the charity in question his right to receive the trust payout in exchange for a lump-sum payment? In some states, the answer might be no. Why? Because courts in those states might not want the son to be able to re-write the donor’s carefully considered estate plan. In other words, there’s a state law issue here.

Suppose state law is not a problem and the son and the charity go forward as the son has proposed. The trust will then terminate (assuming there is no other payout beneficiary named in the trust instrument). Will the son have to report his cash payment as income? Answer: Yes, as a capital gain.

Assuming the son simply gives up his right to receive the trust payout, can he get a federal income tax charitable deduction for the relinquishment? The answer is a qualified yes. Why qualified? Because the son may need to get a qualified appraisal, and that may be tricky.

So far, the discussion is on solid ground. The ground becomes less solid when dealing with the relinquishment of gift annuity payments. There the tax law is murky.

Click here to download our free white paper “Relinquishing Life Income Payments – The Whole Story” for more information on this topic.

by Jon Tidd

Dow Doubts???

By Barlow Mann

Dow Jones fears

Has the latest news about the Dow Jones Industrial Average falling created fear in your fundraising departments? (Read this USA Today article here.) Even though many popular stock market indexes are experiencing the first market correction of at least a 10-percent decline in 5-6 years since the financial crisis saw the Dow Jones Industrial index fall from over 14,000 to less than 6500, few people are predicting that the markets will fall below pre-recession highs. Under this scenario, wealthy donors still have quite a bit of appreciated property when compared to previous years’ lows for real estate and securities.

Look for more information about the impact of the Dow’s latest news in our October issue of Give & Take, which should be available during first week of October. In the meantime, you might consider fortifying your end-of-year donor appeal with one of our Year-End Giving brochures.

 

Gift Planning and Same-Sex Marriage

Male wedding couple topper

by Jon Tidd

Twenty years ago, there were two groups of donors: marrieds and unmarrieds. Today there are two groups of donors: marrieds and unmarrieds. The difference is that today the number of potential married donors has been increased significantly by two recent Supreme Court decisions on same-sex marriage. The bottom line is that all the gift planning opportunities and advantages available to traditional married couples are now available to same-sex married couples, everywhere in the United States.

The question is, what are the gift planning opportunities and advantages specific to married couples? That’s a question having a rather elaborate answer. Here are a few examples:

  • A husband and wife together may create a charitable remainder trust (CRT). Two or more unmarrieds (say, two domestic partners) may not.
  • If wife creates a CRT just for husband, she makes a gift to husband for federal gift tax purposes, but the gift qualifies for the federal gift tax marital deduction. The marital deduction is not allowed to an individual in a civil union or domestic partnership.
  • Gift annuities can be trickier for marrieds than for unmarrieds. As an example, suppose husband uses appreciated stock to set up a gift annuity just for wife. No problem, right? Husband gets a marital deduction, right? The problem is, husband realizes a capital gain that he can’t spread over wife’s “life expectancy”.

There’s a lot more to know about gift planning for marrieds, most of which will be foreign to many same-sex marrieds, who never faced such issues before. We’ll continue to write about this subject and delve deeper. Be sure and subscribe for updates to this blog so you won’t miss out on those. Click here to download our free white paper “Gift Planning for Same-Sex Marrieds” for more information.

What Will Happen to Your Beloved Pet When You Die?

When hotelier Leona Helmsley died in 2007, she left $12 million to care for her dog. Michael Jackson left $1 million to provide for his chimp. Oprah Winfrey has reportedly set aside $30 million for her dogs. (Click here to see more stories about wealthy pets.) When wealth is set aside for pets in an estate, it is often the subject of ridicule, but many pet lovers who see their pets as members of their family completely understand and sympathize. If you loved your pet like a child during your life, it would probably be very important to you that this pet would be well cared for in the event that they survived you, especially if you do not have human heirs.

While pets are legally recognized as property and can therefore not be bequeathed money directly, most all states in the country now recognize pet trusts (click here for a list of state laws regarding pet trusts). Much like a trust created for the care of a minor child, pet trusts name a trustee who is legally bound to care for a pet per the instructions of the deceased. This Huffington Post article talks about a variety of ways to protect your pet after your death.

For more information on pet trusts, see our recent article from Give & Take.

 

Robert Sharpe’s Opening Symposium Presentation at the 2014 ACGA Conference – Trends in Planned Giving

Here you can watch Robert Sharpe’s entire presentation (1.5 hours) from the April 9, 2014 ACGA conference.

Summary

Recent reports indicate that philanthropy in the U.S. is on the verge of recovering to pre-recession levels.  This is welcome news to those whose role is to encourage charitable giving.  At this juncture, however, it is important to note that the future of philanthropy may be different in many respects from the past.

The combination of a rapidly aging donor population, budget deficits, low interest rates, stock market and real estate value fluctuations, proposed new taxes on amounts given to charity and the elimination of the federal estate tax for over 99 percent of all Americans will mean inevitable changes in how donors make charitable gifts, especially larger ones, in coming months and years.

For example, when working with the emerging Baby Boomer generation how can we encourage gifts that will produce the most funds in the shortest period of time? Learn why counter-intuitive approaches may be more productive in an increasingly competitive environment.

Video

We hope you enjoy the video and that it will be helpful as you make your plans for the future.

To learn more about how you can increase your success in coming years, contact us.

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.