Finishing 2002 on a Strong Note | Sharpe Group
Posted September 1st, 2002

Finishing 2002 on a Strong Note

There is no doubt the U.S. economy has experienced a recession this year, though experts may differ on when it began and whether it has actually ended. Unemployment has risen and many workers—and donors—have lost their jobs. In addition, investment markets have fluctuated in value, and interest rates have reached lows not seen in decades. Add to all of this the devastating emotional impact of the events of September 2001 and this year has shaped up to be one of tremendous challenge for fundraising activities.

Admittedly, no one could say this year has been “business as usual.” But many organizations are still raising record amounts from both current and deferred gifts. Are there steps that you can take that will boost giving this fall?

First and foremost, it is important not to take a “one-size-fits-all” approach. Every constituency is different, and most organizations and institutions have multiple groups of donors whose interests must be addressed in different ways.

The broad base of regular donors—young and old

During a recession, younger persons, and those with the least seniority in their jobs, are generally the most vulnerable. But because the donors to many causes tend to be drawn from the ranks of older persons, recessions do not usually have a great impact on giving. A retired person cannot lose his or her job, after all. This is one reason charitable giving historically does not decline much overall during periods of recession.

Middle-aged donors still in the work force

Some donors in their prime earning years may actually increase their giving during recessionary times.

Why? Studies show Americans tend to give about 2% of their discretionary income to charity. If those who are still working decide that they need to cut back on luxury expenditures, perhaps the purchase of a new automobile or a trip abroad, the funds that would have been expended for those purposes are returned to the discretionary category. These funds are then used to pay down debt, are saved, or are devoted to other purposes—one of which may be a charitable gift they may not otherwise have completed.

For this reason, it may be more important than ever to pay special attention to donors who have given at mid-range levels in the past. Where possible, approach these donors with a message of thanks for prior contributions, acknowledge that you realize that some people have been hit hard financially this year, and ask them for a gift if they feel they can still afford to give. You may be surprised by how many will decide to “prove” they still have the economic capacity to match or exceed their past giving history.

The wealthier donor

Wealthier donors of all ages who typically give from their capital resources or depend on income from trust funds or from their investments to make gifts may not be as reliable a source for gifts this fall as they have been in the past. Donors who decided to “stay the course” in financial markets the past few years may have lost 25% or more of their wealth, depending on how their portfolios were invested. Those who have sustained major losses may understandably feel they are not in a position this year to make the gifts they would like to make. In dealings with this group, patience and understanding will be required and will be greatly appreciated.

On the other hand, those who cashed out of the markets before this year’s declines and re-invested in cash and bonds may now have more wealth than ever, and may thus be able to continue making significant gifts from their capital resources.

In any event, it may be impossible to know how recent market fluctuations have affected your constituents, so make certain that all donors who have made significant gifts in the past are actively thanked for past support as part of any solicitation this fall and are made to feel you understand if they are not able to give as much this year.

The “bounce back” effect

Major market indices have been down as much as 25% this year and 35% or more from their peaks in 1999. As of late August, the markets have recovered to the extent that year-to-date losses are in the range of 10%. This means that long-term investors who stayed in the markets and did not sell their stocks may still have significant gains.

For example, if an investor purchased General Mills stock five years ago for $32 a share, the stock would have peaked in value at $53 earlier this year. As of August 21, this stock sold at $41 per share. Despite this recent drop in value, overall this investor still enjoys a 28% gain in the shares.

If this shareholder believes General Mills will soon return to previous higher price levels and does not want to sell the stock, what should she do? If she were also planning to make a $5,000 gift, and has $5,000 in cash from the sale of other stocks, she should give $5,000 worth of the General Mills stock that cost $3,900, bypass capital gains tax on the remaining $1,100 increase in value, and take an income tax deduction for $5,000 that could serve to reduce her income tax by nearly $2,000. She can take the cash from the sale of the other stocks and repurchase the General Mills stock at a higher cost basis.

When the “dust settles” she has made a $5,000 gift and still owns $5,000 worth of General Mills stock, only now the stock has a $5,000 cost basis. If its value increases again, the investor has less gain to report; if it goes down, she now has a loss to report on a sale rather than just less gain.

There may never have been a time when more persons needed to know about this strategy and are also in a position to take advantage of it. Donors will seldom, if ever, be aware of this approach and act on it on their own. Development executives who do not inform their higher-level donors of this possibility may be overlooking a tremendous opportunity to “jumpstart” stock gifts this fall.

Older donors

Donors who are older and for the most part retired may have a “love/hate” relationship with the current economic environment, particularly with lower interest rates. While they “love” the fact that lower interest rates may have caused an increase in value of longer-term bonds, they “hate” the fact that income on more recently purchased investments may be less than they would like. Now is an excellent time to inform this group that they may wish to make an outright gift using appreciated bonds, or use cash they would otherwise invest at lower yields to fund gift annuities and other life income gifts.

Pay special attention to those who have already indicated they have made charitable provisions in their estate plans. Now may be a good time to remind them that there is no guarantee that their bequests will result in estate tax savings. Because of that uncertainty, they may want to make a gift now that will come to fruition at their death that features increased income as well as capital gain and income tax savings they can enjoy today.

Act now

These are challenging times for fund development efforts, but there have been obstacles before that have been surmounted, as will those that face us today. The key to continued success is to step back and think about the different groups of persons who support your organization or institution and consider how their concerns differ depending on their age and wealth—and then devise appropriate strategies for each group.

Donors can be encouraged to “give their way out of the market” if they wish to leave. Effective gift planning can help them diversify their holdings in a tax-favored manner while they make maximum use of new estate and gift tax exemptions.

There are unprecedented amounts of cash sitting on the sidelines. It may be best for some donors to give that cash this year rather than appreciated property and thus take advantage of the ability to deduct up to 50% of what may be a lower adjusted gross income amount.

Development executives who take the time to make plans based on careful analysis and execute them swiftly and effectively may find that 2002 could actually be their best year ever for both current and deferred gifts!

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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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