Editor’s Note: Last month Give & Take brought you the first in a series highlighting common misconceptions in the gift planning field. This month we are pleased to continue our discussion on the fallacies of planned giving with our second myth: “Most persons who make planned gifts are wealthy.”
A major misconception that sometimes leads to poor performance in gift planning programs is the belief that most large planned gifts are made by people of great wealth. While stories abound of six- and seven-figure bequests coming from the estates of persons who had made very modest, even tiny, gifts during life, these cases are often treated as amazing exceptions. As it turns out, these gifts are more the rule than the exception.
Sources of the myth
There are several reasons for the belief that larger bequests and deferred gifts come from obviously wealthy people. First, there has been more prominent media coverage of very large bequests and other deferred gifts from the very wealthy. They are well known by many and make for interesting coverage. On the other hand, when a little-known widow with no living heirs passes away leaving the bulk of what might be a quite substantial estate to a small number of charities, there is very often no one to interview about the thoughtful and generous benefactor. Story elements like photos and details are hard to find, so, even if one wanted to publicize such gifts more broadly, it seems there is often not much to say.
Another factor contributing to the abiding strength of this myth is related to major donor research. Much of the research capability in the major gifts area has been honed in the context of capital campaigns and other efforts designed to raise major dollars in a relatively short time frame. Of necessity, this research focuses on identifying those individuals with obvious liquid wealth, high incomes, etc. Research tends to look for ownership of securities, closely held businesses, expensive homes and automobiles, evidence of other philanthropic giving, and other such indicators of capacity to make large outright gifts.
Because realized deferred gifts do tend to be large gifts, planned giving is rightly considered part of the major gift development tool kit. Major donors giving on an outright basis are usually affluent, so major deferred givers must be persons of wealth as well, it is thought. After all, as the thinking goes, a person must have the means to make a five- to seven-figure gift even if he or she is going to make such a gift on a deferred basis.
Stage of life is critical
Assuming a strong belief in the mission and desire to make larger gifts, the fact of the matter is that how much a person owns is not nearly as strong a predictor of the likelihood of either a major outright or deferred gift as are the person’s stage of life, debt level, and deployment of assets.
Donors of large outright gifts: Major outright gifts typically come from donors who are between 50 and 70 years old. This is a time of high disposable income generally coupled with diminished obligations to educate children or make mortgage payments. Many people in this group are still working and still receiving the largest paychecks of their lives. The reality of living on fixed income from assets for many years of retirement has not yet arrived. Income is high, debt is low, and assets are available. Major outright contributions are both economically and psychologically feasible. While they may have a will or trust and other plans, most members of this group are many years away from making their final estate plans, the plans that might include the charitable designations that will result in gifts in the reasonably near term.
Deferred gift donors: Most deferred gifts in the form of trusts, gift annuities, and other similar vehicles are completed by people aged 65 to 80. At this point in life almost all are retired, and, even if well-fixed financially, people in this age group have very legitimate concerns about possibly outliving resources that could potentially be eroded by inflation or other factors beyond their control. They are likely to deploy their assets in their own “personal endowments” designed to maximize income while preserving the value of principal. As a result, most in this group are not the best prospects for major outright gifts no matter how wealthy they appear to be. Many will, however, consider a deferred gift as a kind of “testamentary rollover” from their own personal endowment funds to the charitable purposes they support.
Examining available data
The myth that larger deferred gifts come from persons of great wealth also persists because we have much more information about large estates than we do about smaller estates.
Of approximately 2.4 million U.S. deaths in 1997, only about 60,000 (or 2.5%) estates were required to file estate tax returns. Of these large estates (over about $600,000), only 19%, or less than 12,000, made use of the charitable estate tax deduction.
Compare the fact that fewer than 12,000 wealthy persons with taxable estates died leaving gifts to charity with Giving USA’s 1997 figure of $12.6 billion coming from bequests. If those persons accounted for all of the charitable bequests in America, the bequests would have to amount to over $1,000,000 per estate! As the average bequest in this country is in the range of $30,000, and the average will contains approximately five bequests, it would take 80,000 persons to account for $12.6 billion dollars. While exact figures on the number of non-taxable estate gifts and their total value is not available, it is clear from even a rudimentary analysis that the vast majority of charitable bequests are coming from persons who die with less than $650,000, and could only be described as middle-income Americans. The same can be said for most gift annuitants.
Charitable remainder trusts average somewhere in the range of $400,000 nationwide. In our experience the total wealth of persons who enter into such trusts tends to be somewhat higher than bequests and gift annuities, perhaps in the $1,000,000 to $3,000,000 total asset range. Such persons are definitely comfortable but not among the ranks of America’s typical major outright donor. The wealthiest persons in our society simply have less need for the additional income and asset management afforded by such vehicles and increasingly see capital gains income taxed at 20% as the preferred form of taxation when compared to ordinary tax rates of 40% or more.
“Old” vs. “new” money
Based on many years of anecdotal experience of our staff members and clients, it seems that people who inherited their wealth tend to be quite generous during life, but less so in their estate plans at death. Arguably, this group of donors thinks of their wealth as being their own only in trust, if you will. They did not earn it and may not feel it is really “theirs,” and they may thus feel a strong obligation to pass it on to future generations of their family. Meanwhile, outright major giving during life is just one of the social expectations that goes along with inherited wealth.
On the other hand, the experience of many in this area of development indicates that those who start out with very little and build great wealth through their own labor, ingenuity, investment skills, etc., are often less likely to be major current contributors and more likely to leave large bequests and other deferred gifts. They are likely to hold onto assets until death because they remember times in their own lives (perhaps during a Depression-era childhood) when they did not have enough, and they fear that such times could recur, particularly if they live a long time on a fixed income.
While the holder/”trustee” of great inherited wealth has a choice to make as to whether to preserve the family’s wealth or give it all away to charity, the owner of self-made wealth has to decide whether to begin a cycle of inheritance that may continue for generations or to disperse his or her wealth back to the society via large charitable bequests, thereby affording younger generations the great pleasure of building their own fortunes!
The conclusion is that the very wealthy persons who do leave significant amounts to charity at death tend to be self-made persons who live beneath their means during their lifetime and are more difficult to uncover utilizing traditional research techniques designed to aid success in major outright giving. These persons are more likely to “self identify” through marketing efforts aimed at long-term older donors making current gifts of any size.
No where else to go
The discussion above assumes the holder of wealth—old or new— has living heirs who may or may not receive inheritances. By far the greatest number of large bequests come from widowed or never-married persons (mostly women) who have no other living heirs. Their choice when drawing up their final estate plans becomes whether to benefit those charitable institutions and organizations in which they believe deeply, or federal and state governments and/or relatives to whom they may not be close. Most people in this situation will choose charity. Indeed, a study by Dartmouth College in the early ’90s indicated that 14 of 15 bequests over $100,000 came from donors with no living heirs. All but one had a modest lifetime giving record and would not be considered “wealthy” by most person’s standards.
The damage done by this second myth in our series has been incalculable over the years. This results from the fact that undue attention is paid to persons holding great obvious wealth while loyal donors of lesser amounts–some of whom may be “millionaires next door”*–are overlooked. Especially in larger organizations managing large donor files on computer data bases, loyal smaller donors are allowed to lapse when their regular giving ceases. This is precisely the time that those donors may be planning for the ultimate distribution of the accumulated assets of a lifetime. Meanwhile, inordinate amounts of time are spent trying to encourage large deferred gifts from persons who may not have the practical ability or the psychological or spiritual inclination to make such gifts.
Next month’s myth: “Planned gifts are primarily motivated by tax incentives.”
* A reference to the best seller, “The Millionaire Next Door,” by Thomas Stanley and William Danko, published in 1996 by Longstreet Press, Atlanta.