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Planned Giving: What's a School to Do?

Where to focus attention during a recession
University Business, Sep 2009

NO ONE ENVIES YOU, DEAR READER. Higher ed administrators are seeing students with greater financial need and donors with shallower pockets and shorter arms. What are you and your fundraising folks to do in order to narrow that gap?

Start by diverting your attention away from where it’s not needed. Don’t sweat President Obama’s charitable deductions proposal. Media attention on the proposal to lower the value of tax deductions for charitable donations by wealthy individuals has focused on high net-worth giving. But the fact is, most charitable giving in the United States comes from nonwealthy donors. Will Obama’s proposal change that fact— Of course not.

It would limit charitable deductions to 28 percent for taxpayers at the highest marginal income tax rate, currently 35 percent, whose annual income exceeds $250,000. For example, a $1,000 gift from these donors would earn a $280 charitable deduction rather than a $350 deduction. This isn’t great for fundraisers, but it won’t have the devastating effect on charitable giving that critics predict. Consider these points:

  • Proposals may not become laws.
  • If the proposal does become law, it won’t take effect until 2011. There would be time to educate donors and retune fundraising messages. And high-income donors would have two years to continue making gifts that are deductible up to their highest marginal income tax rate. I see here an opportunity to encourage donors to accelerate pledge payments to earn maximum deductions.
  • High-income donors contribute a small percentage of all charitable gifts, and tax advantages aren’t why they give.

Nearly two-thirds of all charitable gifts made in 2004 came from donors whose income was under $200,000, according to Giving USA 2007. (This is the most recent year for which I can find this statistic, but giving patterns don’t shift much over five years.)

Americans give to nonprofits because they value the missions they're supporting.

As development professionals have long recognized, enormous gifts from the wealthiest donors make headlines, while gifts from those at middle and low incomes comprise most of the giving to our nation’s nonprofits. As for the motivations for giving, in the 2007 U.S. Trust Survey of Affluent Americans study, only 33 percent of respondents cited tax advantages as their first thought when deciding whether to donate.

Americans give to nonprofits because they value the missions they’re supporting; they believe in a scholarship program, a groundbreaking line of research, or a promising modern dance department; they want to set an example for others, including their children; they want to repay the college and society they regard as having enabled their success; and they want to help those who have less. Taxes? They certainly figure in, but they’re not top of mind.

Where should you divert your attention?

The planned giving area has a few tempting offerings for those who are talking to prospects and donors. For the higher ed clients of our firm, that means all the C-level leaders, rather than just development staff, will join us for 90 minutes of training on how to open planned gift conversations. We cannot make them experts, nor should they be. Their expertise is in their profession. (Besides, if they became experts they wouldn’t need us.) We can get them comfortable opening the door and inviting the experts to join in the next step.

I hope your gift planning experts are offering to train you and your colleagues. And I hope you accept their overtures. You will help cultivate a valuable culture of fundraising at your school when the largest possible number of administrators is encouraging giving.

Now that you’re paying attention to planned giving, here are gifts that can help your college—and your donors—through our recession.

If you have bullish prospects who are charitably inclined, look to the charitable remainder unitrust for a term of years. This is a staple of planned giving programs. Your school may already be named in some. It pays income to one or two “income beneficiaries,” and that income is a fixed percentage of the trust value. At the end of the term, the remainder is a gift to your school.

The trust’s market value is calculated anew every year, and that revaluation feature makes the charitable remainder unitrust a terrific charitable vehicle for bullish donors who believe we’re at or near the market bottom. They will enjoy the run-up in the trust’s portfolio because their annual income from the trust will be tied to the portfolio’s market value.

The savvy donor will fund a trust with appreciated stock so she can avoid capital gains tax liability at sale. For the nonsavvy donor, you’ll be a hero when you explain this.

Think there’s no longer something called “appreciated stock”? Actually, there’s still a lot of appreciation around. Donors who have held equities for decades have very low basis positions. Their portfolio isn’t worth what it was last summer, but many long-term investors do have stocks worth more than they paid for them.

Get donors to put those stocks in the trust for two reasons. When the trustee sells them for diversification, the donor will avoid tax on the gain; these are tax-free trusts when they’re properly created. Also, the donor will enjoy increasing income as the new portfolio rises in value. Remember, this gift strategy appeals to bullish prospects.

The trust income itself is taxable, but it can be taxed below ordinary income rates. Income from these trusts is characterized by how it is distributed by the trust. To the extent that the trust realizes and distributes capital gain income, which is typical in the first year due to sale of the funding assets, your donor will be taxed at capital gain rates. If the trust distributes tax-free income, earned from a tax-free portfolio, it will be paid as such to your donor. Not surprisingly, the trust must distribute all of its ordinary income before capital gain income and all its capital gain income before tax-free income.

Beyond the income, income tax, and capital gain tax advantages, the donor earns a charitable deduction in the year she creates her trust.

Do you need to know this level of detail? No. So why did I throw it at you? You need to know just a little more than the elevator pitch and not as much as I’ve provided. Having more information than you need helps you understand what’s behind the gift ideas you’ll be raising with prospects. That understanding builds your confidence in those door-opening conversations.

These trusts typically run for the lives of the income beneficiaries. That’s the way nonprofits usually think of them. Look at them, instead, for a term of years, such as the number of years your donor thinks will get her through the recession. A three- or five-year trust (the duration must be determined up front) will pay its income for that term and pay its remainder to your college.

Recognize that one charitable remainder unitrust can benefit multiple nonprofits. That feature comes in handy when you hear, “I love my alma mater but I have other organizations I’m supporting.” You’re armed with the retort, “There’s a way to help your alma mater and the others.”

In exchange for shifting risk to you, your donor sacrifices the upside potential of a rise in this trust's portfolio.

The creator of the trust need not receive its income. A trust of this type can help your donor’s loved ones through the recession. The donor can designate a sibling or his or her parents as the income beneficiaries.

What if your next dinner isn’t with a bullish prospect but, rather, with one who is risk averse—and charitably motivated— She doesn’t know when the bottom will come and won’t bet income on her best guess.

This donor will prefer the charitable remainder annuity trust. It too pays fixed-percentage income, but there is no annual revaluation. The rate of income is applied to the trust’s opening value to determine the dollar amount paid each year. This trust pays fixed income.

The donor knows from the outset—and to the penny—how much will be received in each year of the trust’s life. This is perfect for the market wary. The risk is borne by the college as remainder beneficiary. If the annuity trust’s earned income doesn’t cover the payout to income beneficiaries, then the principal gets invaded to make up the difference. An annuity trust agreement explicitly grants that authority to the trustee. Exercising that authority means less on the back end for you. In exchange for shifting risk to you, your donor sacrifices the upside potential of a rise in this trust’s portfolio.

Talk to your dinner prospect about setting this one up for the same term suggested for the charitable remainder unitrust: the number of years she thinks it will take to get out of the recession.

Both of these trusts must pay out between five and 50 percent to income beneficiaries. Fifty percent! What donor wouldn’t take that and leave zilch for the college in a three-year trust? Believe in your government. The IRS has arcane formulas to limit payouts and prevent gouging. Almost every trust pays between five and 10 percent.

That’s the short course to make you more comfortable and confident having discussions about planned giving. Imagine how much more entertaining you’ll be at your next prospect dinner.

Tony Martignetti, an attorney, is managing director of Martignetti Planned Giving Advisors LLC (, a consultancy that works with institutions to create donor opportunities by building planned gift programs. He can be reached at