Until the early 1970s, the term “planned giving” was rarely if ever used to describe gifts made as part of a donor’s estate and financial planning process. The expression “deferred giving” was the preferred term to describe the activities inherent in the process of encouraging such gifts. This was because for the most part “deferred gift” programs at that time emphasized irrevocable trust agreements, gift annuities, and similar gifts that were completed in the present but did not provide funds for charitable use until the death of one or more persons, or the expiration of what was typically a long term of years. Bequests via will were seen as “over-the-transom” gifts that were an unreliable and unpredictable source of income.
While many nonprofits had departments dedicated to “deferred giving,” and “directors of deferred giving,” these efforts rarely received much attention or support because they were, after all, dedicated to producing future funds, while the management of most institutions wanted funds that could be expended immediately on operational needs or near-term capital projects. Deferred gifts were especially downplayed during capital campaigns because of an understandable fear on the part of leadership that outright gifts would be “diverted” into plans that would “defer” the benefit to the recipient institution for too long a period of time.
“Planned giving” is born
In the early 1970s Sharpe consultants and others began to encourage charitable organizations and institutions to think more broadly, and realize that the planning process underlying “deferred giving” could also produce gifts in the short term. The term “planned giving” was adopted in an attempt to encourage a paradigm shift that would refocus thinking in this important area of fund development activity.
Note this excerpt from the August 1972 issue of Give & Take: “A donor usually considers a current gift to your institution as a cash outlay now. To make a deferred gift, a person decides to give at some future date, either a number of years from now or at death. A deferred gift is a present decision to make a future gift, evidenced by a legal contract. While the name, ‘deferred giving,’ is the best known to professionals in the field, it is not a term that communicates very much to the average donor. Therefore, we suggest the term ‘planned giving.’ When a person makes a planned gift, it suggests forethought.”
During the period from the early 1970s to late 1980s, the term “planned giving” largely supplanted “deferred giving.” For many organizations and institutions, however, the activities of the programs that had implemented a name change from “deferred” to “planned” giving remained largely the same, with “planned giving” simply becoming a substitute in many cases for the term “deferred giving.” The history of terminology in this field is, thus, to a large extent at the base of the myth that “planned giving” is an activity that primarily focuses on gifts that take many years to come to fruition. That need not be the case and is not the case for many of the nation’s leading nonprofits.
Defining a process
Consider our definition of “planned giving” as we prefer to describe this process today: “A planned gift is any gift of any kind for any amount given for any purpose—operations, capital expansion, or endowment —whether given currently or deferred if the assistance of a professional staff person, qualified volunteer, or the donor’s advisors is necessary to complete the gift. In addition, it includes any gift which is carefully considered by a donor in light of estate and financial plans.”
Let’s break this definition down to its component parts and see if we can get to the root of the confusion surrounding the timing of planned gifts.
First, notice that timing is only one element in the process, although a vitally important one. Various gift planning tools produce funds in different periods of time. There is actually a continuum between current and deferred giving with some gifts made on an immediate basis and others over very long periods of time, with most somewhere in between.
In the remainder of this article, we will examine the typical time periods in which various gifts provide their charitable benefits. In our experience, the most successful gift planning programs are based on the reality of timing of gifts with integrated programs built around which gifts are appropriate to fund which mission element at various stages of a donor’s life cycle.
Outright gifts of cash are the most common and the simplest gift to make and, in terms of volume, make up the vast majority of charitable gifts in America today. Outright gifts of property are also of vital importance, with gifts in the form of securities, real estate, and other property comprising the bulk of the total value of many institution’s gifts each year. Gifts of property (and even large gifts of cash) can often require very careful planning, the involvement of one or more advisors, and can be extraordinarily complex. That is why they are typically handled by gift planning specialists. They are not properly referred to as deferred gifts, but they are, in fact, planned gifts. This is one area where terminology based on size, such as “major gifts,” overlaps with terminology based on process and is at the root of unnecessary internal friction in some organizations.
Lead trusts and pledges
Pledges are “deferred gifts” in the sense that they involve irrevocable commitments to make future gifts. But pledges are not usually thought of as planned gifts although they typically involve gifts made over a period of time. Charitable lead trusts, like pledges, are typically used to fund gifts over a period of time. Is a lead trust, then, a current gift or is it a deferred gift? It is, in a sense, both, and points up the fallacy in considering planned gifts as just another term for deferred gifts.
Charitable bequests often require less time to come to fruition than do pledges to a five-year-long campaign. Time after time, studies have shown that the average time period from making a final will that includes a charitable bequest until the death of the benefactor is five years or less. The median time period is typically three to four years. Thus, when experts refer to a planned giving program taking three to five years to produce usable funds, they are referring primarily to programs designed to encourage charitable bequests.
The average age of gift annuitants today is approximately age 78, with 90% falling between the ages of 70 and 85. At 78 a woman has a life expectancy of about nine years. Hence the gift annuity is positioned on the continuum in the time slot just beyond the charitable bequest.
Charitable trusts for term of years
Charitable remainder trusts can last for the life of one or more persons or for a period of time not to exceed 20 years. The typical term of years trust is established to accomplish an economic objective of the donor that requires an income stream over a period of time. Such objectives include funding education, income in pre-retirement years, etc.
For example, consider a $1 million charitable remainder annuity trust that pays a donor 20% or $200,000 per year for five years from age 65 to 70, from which point in time the donor will rely on retirement funds to “replace” the income previously received from the charitable remainder trust. The donor is entitled to a $162,000 tax deduction at the time of the gift, and would avoid capital gains tax at the time of the gift if low-basis appreciated securities were used to fund the trust. If funded with such assets, much of the donor’s annual payments of $200,000 will be received tax-free or as capital gains taxed at a favorable rate. If the trust earns 8% total return per year, it will be worth about $300,000 at its termination. This is the amount of the gift credited to a campaign the donors wish to support, as the $300,000 will be received at end of the campaign’s maximum five-year pledge period.
Do we classify this as a deferred gift? Current gift? Planned gift? Term of years trusts are perhaps best thought of as ways the donor can either delay for a few years an outright gift or accelerate a gift that would otherwise be deferred until the end of life!
Life income gifts for life of older loved one
Younger donors are often surprised to learn they can fund “deferred gifts” with the measuring life being that of an older person, typically a parent. Increasingly, wealthy baby boomers will create gift annuities and charitable remainder trusts for the lifetime of their elderly parents. This is a way to use a younger donor’s money and an older person’s life expectancy to bring “deferred gifts” to a younger constituency, while producing funds for charity in a shorter period of time. In most cases, such gifts will come to fruition in a period of between five and fifteen years.
Life income gifts for life of younger donor
Finally we come to the traditional “deferred gift,” and the one that gives rise to the prevailing attitudes regarding the timing of the receipt of funds from planned gifts. Life income gifts in the form of pooled income funds and charitable remainder unitrusts for life are typically entered into by donors in their late 60s to early 70s. A 68-year-old couple has a life expectancy of some 22 years. A 60-year-old couple has a life expectancy of 30 years.
Many charitable causes have urgent needs for program funding and endowment today. Fund development efforts that produce usable funds in a quarter of a century or more will, for that reason, rarely rise to the highest priority level. These are precisely the gifts, however, that are often given the greatest amount of attention by gift planners, as these are the gifts that typically provide the greatest benefits for the donor and the greatest reward for financial services providers who are increasingly central to the planning process underlying planned gifts. The longer time frames allow for more time for insurance premiums to be paid to make the gift “work,” for instance, from the standpoint of many commercially-based gift planners.
There is of course nothing wrong with encouraging charitable remainder trusts for life among your mix of gifts. Use caution, however, that these long-term gifts do not take up the lion’s share of your time and marketing activity when the other gift planning options outlined above are likely to produce usable dollars faster—in some cases many times faster. The question becomes one of how time and resources are best allocated. Remember that many of the nation’s leading financial services providers are now devoting tremendous resources to marketing charitable remainder trusts and similar gifts. For this reason, charitable recipients should be sure that they place priority on bequests and similar gifts which redound more quickly to the benefit of charitable beneficiaries.
Return to basics
As we can see, planned gifts can be “deferred” for longer or shorter periods of time. Let’s step back and return to basics. What is essentially happening is a process where money or other assets are moved from point “A”, the donor, to point “B”, a charitable recipient, as quickly and cost effectively as possible in light of the economic priorities of the donor and the mission-driven needs of the charitable recipient.
Many forward-looking programs are now bringing the nomenclature describing their programs into line with activities variously referred to in the past as “deferred giving” and “planned giving” by utilizing the term “gift planning” to describe their activities. We believe the term “gift planning” is more descriptive of the process that results in assets being directed to charitable purposes in ways that can result in current or deferred gifts that can then be used when received to fund operations, capital and/or endowment needs as determined by the recipient in consultation with the donor.
Charitable gift planning efforts engaged in by nonprofits in close cooperation with donors and their advisors will increasingly form the bedrock of financial support of religious, educational, social service, cultural, and other activities that underlie much of our culture as it exists today. To maximize funding from these activities it is imperative that we free ourselves from the constraints of thinking exclusively in terms of long-term funding and include in our tool boxes the many ways that gift planning vehicles can provide a tremendous source of near-term financial support.