by Robert F. Sharpe, Jr.
Note: In the print version of Give & Take, this story is running in two parts. Part one was featured in the October, 2016 issue, and part two appears in the November, 2016 issue as “How Blended Gifts Can Lead to Larger Gifts.” The article is available online below in its entirety.
Older baby boomers are now entering the age at which they are planning the ultimate gifts of their lifetimes and will increasingly be giving in much more sophisticated ways than previous generations.
Last month marked the 30th anniversary of an article that appeared in the September 11, 1986 issue of the Wall Street Journal. The article, entitled “Baby Boomers Have ‘60s Heritage, But Charities Say They’re Cheap,” examined the state of baby boomer philanthropy as the first boomers turned 40.
At the time, charities were bemoaning the fact that baby boomers weren’t giving like their parents, and some predicted they never would. I am quoted in the article, stating that “we see a major concern among organizations that their main donor base is getting older and not being replaced by the younger generation.”
Sound familiar? It seems not a day goes by without someone mentioning the fact that millennials are not yet a major force in philanthropy, nor does there seem to be charities with significant numbers of millennial donors. This should come as no surprise. Just as the baby boomers were in 1986, the millennials are in early career stages, buying homes, having children, planning for education and all the other expenses that can impact the amount of discretionary spending―and giving―they feel they can do.
Reaching their golden years
But what of the baby boomers today? According to industry and IRS reports, the baby boomers (who now range in age from 52 to 70) are finally poised to reshape philanthropy and usher in what may be a golden age of charitable giving in America. The Chronicle of Philanthropy reported earlier this year that 60 percent of the largest gifts made in 2015 were from donors over 70. By contrast, only 8 percent of the largest gifts were made by donors under 50, a group that comprises the totality of the millennials and most of the members of Generation X that came before them.
The remaining 32 percent of the largest gifts were made by baby boomers. Based on this data, a case can be made that major gifts should grow dramatically as the first boomers cross the 70-age threshold this year and begin what may be the greatest period for philanthropy in their lifetimes. IRS data released in August 2016 reveals that just 5 percent of itemized gifts in 2014 came from millennials, while taxpayers over age 55 accounted for 60 percent of such gifts. It is important to note that itemized deductions account for some 80 percent of individual gifts each year, and the vast majority of major gifts are itemized on tax returns.
There are lessons to be learned from this information for those who are responsible for major current and deferred gift development. First and perhaps most importantly, let’s not get in too big a hurry to rush estate gifts from baby boomers.
The average age of death for bequest donors is in the range of the mid-to-late 80s. Studies by Sharpe and others have consistently revealed that as many as 80 percent of bequests typically come from donors who make their final wills after the age of 75. [See “Has a Bequest Boom Begun?” in September 2014 Give & Take.] If this is the case, then it will be 15 to 20 years or more before large numbers of baby boomer estates begin to swell estate income from deaths among the 80+ population. While it is very important to make sure charitable interests are included in the earliest wills, most of those wills provide primarily for families. Studies have revealed that in the case of 50 percent or more of wills that include charitable provisions, the next-to-last will did not contain such gifts. [See “What’s Wrong With Focusing on Bequest Intentions From 40-Year-Olds?” in December 2013 Give & Take.]
The next 20 years belong to organizations and institutions that are able to master the art of helping baby boomers structure major gifts―both current and deferred. This article marks the first in a series that will address the many ways baby boomer fundraising will differ from what was effective with the generations before them and what is likely to be different for those who follow them.
How will boomers give?
For the foreseeable future the primary task will be to raise as much money as possible from boomers in ways that result in spendable cash as soon as possible. This will often involve gifts of more complex assets such as art, real estate, business interests, etc. Why? Many reasons, but primarily because the bulk of baby boomers’ securities and other traditional investment assets are locked up in qualified retirement plans that can’t be tapped for gifts until age 70½ for IRAs and not at any age for other plans without reporting the gifts as income prior to hoped-for deductions.
Most boomers are not yet ready for even the most common life income gift plans—charitable remainder trusts and gift annuities. For instance, one of the largest administrators of charitable remainder trusts reports that 68 is the most common age of CRT beneficiaries at time of funding. A recent Sharpe study of nearly 500 unitrusts created by an Ivy League university revealed exactly the same average age of 68. As for gift annuities, the ACGA has found that 79 is the most common age to set up a CGA. The Ivy school average was 81. Baby boomers are just now entering the period of life during which CRTs are most likely to be funded, and it will be at least another decade before they are entering into immediate payment CGAs in large numbers.
In the meantime, it is critical that fundraisers learn how to structure combinations of current and deferred gifts that provide significant gift income prior to the expiration of a decades-long life expectancy.
Enter blended gifts
In recent years, the term “blended gift” has increasingly been used to refer to various ways individuals can make significant charitable gifts. The original use of this term can be found in a presentation I made at the Partners in Philanthropic Giving national conference in Anaheim in 1995.
As the focal point of the presentation entitled “How Will the Baby Boomers Boom?”, I noted that the first baby boomers were approaching the age of 50 and would soon be entering the period in life when many major gifts are planned and implemented.
Given that baby boomers married later than previous generations, were facing unprecedented retirement periods that could last for decades and were, in many cases, responsible for the economic well-being of aging parents, I predicted that this generation would be more inclined to make larger charitable gifts differently from previous generations and would use what I referred to in quotes as “blended gifts” to do so.
The term “blended gift” was originally meant to describe the new and different ways that baby boomers and other seniors might be expected to make gifts. Some gifts would be outright immediate transfers of cash and other assets, while others would be deferred for a number of years or until the death of one or more individuals. “Blended gifts,” on the other hand, would be structured as combinations of current and deferred gifts, with the focus on the total value of the gift.
In subsequent years, the term “blended gift” has been conflated in some quarters to simply describe a basic combination of an outright immediate gift and a commitment to make a future gift through a will, trust or other revocable estate planning vehicle.
The primary driver for this type of “blended gift” is that it is simple on its face and little training is required to prepare staff and volunteers to “ask” for it.
While this approach can result in larger gifts than might otherwise be received, there are more effective and valuable ways to structure blended gifts that provide greater benefits for both the client and the philanthropic beneficiary.
How blending gifts lead to bigger gifts
Consider another way to structure a blended gift that features multiple financial benefits to all parties concerned. Let’s assume that William and Susan, both age 60, have been asked to make a $1 million gift to a campaign. The pledge period is six years, but there are indications that this period may be flexible, especially in the case of larger gifts.
They own securities worth $2 million with a cost basis of $500,000. The stock pays no dividends. They’ve considered making an outright gift of $1 million worth of the stock, but are concerned that one or both of them may need access to these funds to help maintain their economic security later in life.
They learn the campaign offers credit for bequests via wills and other revocable testamentary gifts for those age 60 and older. For those under age 70, gifts are credited at present value based on the life expectancy of the donor(s) using a discount rate of 4 percent.
After considerable reflection, William and Susan offer to make a $1 million “blended” gift. The current portion of the gift is an outright gift of $250,000 of the stock. In addition, they commit to a $750,000 bequest at the survivor’s death.
Present value surprises
They’re surprised to learn that they’ll only be credited as making a $400,000 gift. This sum is the total of the $250,000 outright gift and the $150,000 present value of the bequest based on their joint life expectancy of some 30 years.
One of their advisors has suggested they consider funding a $2 million charitable remainder unitrust (CRUT) using the securities described above. The trust will pay them 5 percent of the value of the trust corpus each year for the remainder of both of their lives.
At the time they fund the trust, William and Susan also execute a pledge agreement in the amount of $1 million to be completed over a 10-year time frame, partially or fully relying on the income stream from the trust to make the payments each year.
Recall the donors aren’t currently receiving any income from the securities, so their current income isn’t reduced when they use those securities to fund the trust. They’re comfortable with this result as they’re still in their peak earning years and have no need of additional income.
Assuming credit is given for the full value of the six payments made during the campaign, and the remaining four payments are credited at present value, the total value of the payments for campaign purposes is $886,000.
The present value of the anticipated CRUT remainder ($616,000) combined with the present value of the pledge payments is just over $1.5 million, and William and Susan are pleased to be credited with a gift of this amount in the campaign.
After the $1 million pledge has been satisfied around the time they plan to be fully retired at age 70, they’ll enjoy additional income of $100,000 per year or whatever amount the trust may be providing at that point for the remainder of their lifetimes.
More funds now…and later
The charity sees its short-term benefit increase from an immediate gift of just $250,000 to a $1 million gift to be received over an estimated 10 years. In the third year, the charity’s cash flow will exceed the original offer. Instead of the possibility of a bequest of $750,000 in an estimated 30 years, the charity will now receive $2 million, or whatever other amount remains in the CRUT, at the death of the survivor.
Further, when the next campaign is conducted, the charity has the option of asking the donors to continue to divert all or part of their annual payments to fund a new pledge, or perhaps suggest they sever a portion of the trust corpus to fund an additional gift in the event the trust has experienced more growth than anticipated.
The above example is just one of many ways to structure gifts from younger individuals in a manner that results in substantial benefits to all parties involved.
The concept of blended gifts holds great promise for charities planning to meet increasing demands for the services they provide now and in coming years.
Through careful consideration of the nature of a client’s assets, the need for current and future income, tax considerations and other relevant factors, it may be possible to help a donor make a gift that may not have seemed possible, while preserving or enhancing present and future financial security. ■
To learn more about blended gifts, join us for our new seminar, “Structuring Blended Gifts,” which will kick off our 2017 seminar schedule on January 24-25, 2017 in Memphis.