Avoiding the Dark Side: The Ethics of Gift Planning | Sharpe Group
Posted February 1st, 2016

Avoiding the Dark Side: The Ethics of Gift Planning

JediMost gift planners realize a strong moral compass is a fundamental component of the code and craft of their profession. Many endorse and follow guidelines issued by organizations like the Association of Fundraising Professionals (AFP) and the Partnership for Philanthropic Planning (PPP) that are designed to encourage best practices in their dealings with donors. Gift planners with legal, accounting or various financial planning backgrounds abide by additional canons.

Even with all of these guidelines, there may be—and typically are—issues in even relatively straightforward gift planning situations that can muddy the water. As a result, most of us would agree that scenarios encountered in the real world are often more complex than they would appear on paper and the various codes of conduct and best practices may be easier to read than to apply.

In presentations to fundraisers, Robert Sharpe advises the use of three “60-second ethical tests” when navigating day-to-day issues.

  • The Stomach Test: If your stomach gets queasy, think twice; your body may be trying to tell you something.
  • The Relative Test: If you would not be comfortable suggesting a course of action for use with a loved one or close friend, maybe it is best not to suggest it to a donor.
  • The “60 Minutes” Test: Would you be comfortable explaining what you are doing to an investigative reporter in national media?

Administering one or more of these simple tests can provide much needed guidance with the dilemmas that inevitably arise from time to time. But understanding a little more about some of the underlying issues affecting the aging donor population may help avoid problems too.

Mental capacity and financial decision

With record numbers of people aged 65 and older, this maturing senior population means that the number of people with Alzheimer’s or other forms of dementia will be growing dramatically. While only about one in nine people aged 65 or older has Alzheimer’s, the number grows to nearly one in three for those 85 and older. And the 85+ group is one of the fastest-growing segments of the population today. The Alzheimer’s Association advises that financial capacity and decision-making skills are among the first areas affected by mild cognitive impairment.

Senior fraud

In recent years there has been an explosion of frauds and scams targeting senior citizens. Many of these criminal activities exploit seniors through aggressive and deceptive marketing techniques. Some of these have involved a “charitable” component. Sometimes the “charitable” solicitation has been for a non-existent charitable organization; in other cases a charitable entity has actually been created to facilitate the criminal activities. In a handful of cases, the “charity” involved promoted charitable gift annuities or charitable trusts as a way to defraud seniors out of millions of dollars. A number of states and other sources routinely warn seniors about “charitable scams.”

The truth and nothing but the truth

Provisions of the Philanthropy Protection Act of 1995 made it clear once and for all that many popular gift planning techniques like charitable remainder trusts (CRTs)pooled income funds (PIFs) and charitable gift annuities (CGAs) were regulated securities under federal laws but could be exempt from registration requirements under certain well-defined circumstances.

In addition to refraining from any sort of misrepresentation, one of the requirements for exemption was to provide written disclosures concerning the material operation of the particular arrangement prior to the completion of the gift. Many Sharpe booklets and other communication materials have been designed with this requirement in mind. The law also emphasized that the anti-fraud provision still applies to these philanthropic activities.

Who me?

None of us want to believe we would intentionally take advantage of a donor with diminished capacity, participate in senior fraud or violate securities laws, but unfortunately it is possible to unintentionally cross the line into murky territory if one is not vigilant.

Tales from the dark side

Consider some of the following scenarios and practices:  Would you ever consider providing build-up unitrust illustrations to a donor without consulting with the likely trustee about their projected investment returns? Believe it or not, this was a relatively common practice in the 1990s when very professional proposals would be given to the donor illustrating a high payout, often in the 8 to 10 percent range with a projected return of 12 to 14 percent.

What about gift annuity illustrations that show annuity payments based on certain amounts that indicate all or virtually all of that amount will be received by the charity? Rates set by the American Council on Gift Annuities are designed to provide a 50 percent gift residuum, so such an illustration could be seen as very misleading.

Have you ever seen planned gift marketing materials that imply a charitable gift annuity or a charitable remainder trust is better than other investments?

Is it appropriate to illustrate significant tax savings without noting that the donor must itemize deductions to enjoy the benefits being illustrated?

Do you think it would be appropriate to use spyware or other “technological solutions” to track the activity of individual donors on your website without their knowledge and consent?

Could it appear there are some inherent conflict issues involved in helping to plan a donor’s estate when the charity is a beneficiary? Or paying to have that work done?

While the answers to these questions may be debatable in some circles, the answers can be determined on an individual basis by applying the three ethical tests outlined above.

Staying on the path

As you consider the path to take in a particular situation or generally with your career, some simple steps may help you avoid unintentionally slipping into a dark gray zone.

First, periodically review the Donor Bill of Rights, the AFP Code of Ethics and other professional canons that may be applicable.

Second, recognize that even though the vast majority of donors over the ages of 65, 75 and even 85 are legally and mentally competent, a significant number are subject to some degree of diminished capacity. Act accordingly on a case-by-case basis.

Third, avoid misleading marketing. Most senior fraud and scam cases involve very aggressive marketing that was intentionally designed to deceptively separate seniors from their money.

Fourth, remember that federal law requires a charity to refrain from misrepresentation in the marketing of many planned gifts and to provide written disclosure about the material operation of most popular gift planning arrangements prior to the completion of the gift.

If all else fails, remember the three 60-second ethical tests. If you can’t pass all three of the tests, pause, regroup and seek input from experienced peers or other professional resources.

Sharpe group training programs feature more in-depth explorations of ethical issues involved in working with seniors. Click here for more information.

Additional Resources

Administration on Aging
American Association of Retired Persons
Commission on Law and Aging American Bar Association
National Center on Elder Abuse
National Committee for the Prevention of Elder Abuse
National Council on Aging
National Association of States United for Aging and Disabilities

See also: The Chronicle of Philanthropy‘s Special Report on Aging and the Securities and Exchange Commission’s “Most Common Older Investor Scams”


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The publisher of Sharpe Insights 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 Sharpe Insights 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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