Investing donors in your success through planned giving, endowments
A recessionary bear market presents many challenges for philanthropy, but it is also the best environment in which to seek planned gifts.
In difficult times donors are focused on their estate and the immediate impact of the downturn. They are rethinking their overall plan. A planned gift allows the donor to be engaged with an organization they care about in a significant way, it strengthens the relationship by allowing the donor to make a delayed yet considerable difference, and it does not require donors to dip into current assets or cash to which they may not have access.
Failing to put effort into planned gifts in this environment is a lost opportunity. Positioning your agency to receive them is imperative.
Endowments are often the magnet for attracting significant planned gifts. Endowments are not magical, but what they can help accomplish can be. Sadly, most of us in the community-, family-, senior-, and child-serving fields do not have an endowment upon which to leverage our mission, or that endowment is meager. However, with a modest but focused planned gift campaign, we have a huge opportunity awaiting us.
The word endowment is frequently misused, so it may be helpful to begin with some definitions.
Endowed Fund. An endowed fund is a charitable gift established in perpetuity by the donor. The principal is invested for total return (both income and appreciation), and a small portion of the fund’s balance (typically 4-6 percent) is drawn down on an annual basis.
Endowment. An organization may have a number of endowed funds. They may be established for a variety of purposes and reasons ranging from general support of the agency to specific program or infrastructure support. All of these endowed funds make up the agency’s endowment. These are restricted assets; the principal is not available to the agency or its board without court order or, if the donor is still living, written agreement by the donor.
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Make the Reserve Fund. The endowment is a very different financial tool/instrument than a board reserve fund, which is often improperly referred to by an agency as its endowment. Board reserved funds are unrestricted net assets, and they may be invaded by the board or a future board. They may be a great financial discipline, but they are not endowed funds.
Simply put, if a board creates an endowed fund out of reserves, windfalls, unrestricted gifts, or bequests, those funds remain unrestricted net assets and are best understood as a “quasi-endowment” or as reserved funds.
If a donor makes a gift for an endowment, it is a true endowment and thereby permanently restricted. According to the Financial Accounting Standards Board (FASB), a true endowment or permanent endowment is created when, and only when, a donor has declared the gift is to be held permanently as an endowment for general or specific purposes.
A true endowment must be restricted in a written agreement by the donor, or it is secured via a response to a specific solicitation from the agency which promises the donation will be used as an endowed gift. Only the donor can create an endowed fund. FASB guidelines are clear that the portion of the endowment that must be maintained permanently—not spent, invaded, or exhausted—is classified as permanently restricted net assets.
In rare cases a donor may create a term endowment that has a set period of years attached to it or is triggered by some event. In this case the funds are temporarily restricted net assets.
Planned Giving: Vehicle to Endowments
How does this relate to planned gifts? Simple; planned gifts or planned giving is typically how most endowments have been—and will be—built. The planned giving program is a vehicle or process that may result in the creation of endowed funds.
However, many planned gifts can be and will be unrestricted. In those cases the board may opt to restrict those funds into a reserve, or quasi-endowment. The gift is shown as unrestricted revenue in the year received.
There are a variety of mechanisms by which a donor can make a planned gift. They range from cash, securities, bonds, real estate, and tangible property. There are also more complicated financial arrangements, including a charitable gift annuity, a charitable remainder annuity trust, a charitable remainder unitrust, and a charitable remainder lead trust. My advice: if you’re trying to get started, don’t go here first. It will confuse and overwhelm you and your board.
There are plenty of experts in your community and in our Alliance for Children and Families network who can outline the vehicles. There are community foundations and other commercial resources which could partner with you to secure a sophisticated gift. However, these gifts should be way back on your list of priorities when it comes to beginning a planned gift or endowment program.
Where to Start
So, where should you and the board focus? First, answer a few questions.
Do we deserve to have an endowment? Be honest with yourself. Is your mission relevant to the community and will it continue to be so in the future?
If yes, does your organization warrant major or long-term investment? Would a reasonable donor expect you’ll still be serving the community in 100 years?
If yes, would a reasonable donor expect that you can and would manage an endowed fund well? And most importantly, do your donors even know that you want planned gifts and/or gifts for the creation or building of an endowment?
Although seemingly obvious questions, they are important to answer. No matter what the answers, they will help you and your board members design a plan to move from wherever you are to where you want to be. Endowment building is about the relationship you have with your community and your donors.
Another set of questions to discuss with the board relate to who makes planned gifts or endowed gifts, as well as donors’ motivations for doing so. Again, this isn’t rocket science, but it is an important, deliberative exercise. It can be eye-opening and energizing.
I suggest that almost every one of us in the Alliance network could and should begin a serious planned gift/endowment program. Quite frankly, collectively, as a network, we could even help each other with such an effort.
Investing Donors in Your Success
Who gives? Bill Gates; Oprah Winfrey; George Soros; and the lady down the street who drives a 1987 Plymouth, has three elderly cats and an arthritic dog, has a house in need of painting, and has been donating $50 or so for the past five to 10 years.
I’m not interested in getting in line for gifts from Gates, Winfrey, or Soros—the line is too long, and they don’t know us. But, what about the lady who lives down the street? She is a donor, and she cares about our mission. She has a relationship with us and our community.
Endowments and planned giving is about relationships. If you focus there and start there you may be amazed about the possibilities that unfold—and quickly.
It is also about trust. Diana Newman, in her book Endowment Building—which I highly recommend—gives a number of reasons why donors make endowed gifts. All important, but the one that got my attention was to perpetuate an annual gift.
Have we talked directly with our donors about how they could guarantee their specific annual gift in perpetuity? Some of us now have wonderful giving circles with names such as Second Century Circles, Keepsake Societies, Friends of the Family, and others. Did we build in a discussion about keeping those gifts in perpetuity? I bet few of us have done so.
As I’m writing this column, I’m painfully aware that my agency has made efforts in these directions, but not nearly as directly, energetically, or as intentionally as we should be—and certainly will be—doing very soon.
Many of the modest gifts we receive are from individuals who may have the means to keep those gifts in perpetuity via a planned gift or bequest. They care about our work, they trust us, they value us, and they believe in our mission. We have a relationship with them. Think about it.
Let’s say I’m a Keepsake Society donor at the $1,000 level. If I leave a planned gift of only $20,000 to create an endowed fund, I have made possible an annual gift of $1,000 in perpetuity to the Keepsake Society—and it’s buying power is adjusted for inflation.
If my gift is $500 a year, I only need to leave $10,000. If it’s $100 a year, I only need to leave $2,000—and so on.
We need to focus on this aspect of endowment building with our donors. We need to think through how we might provide recognition to donors in perpetuity. Doing so will make modest gifts to an endowment quite meaningful for the donor and the agency.
By the way, if you’re afraid that after a planned gift you will not receive an annual gift, the reality is the opposite. Most planned givers increase their annual giving while alive. Stop and think about it. The donor just made a major investment in your agency and your mission. They have a solid relationship with you. They want you to succeed; in fact they are invested in your success.
Some of us may think we are too small in size to attract significant long-term gifts. I believe that size of the agency can be a problem as it raises legitimate concerns for the donor about long-term sustainability of the agency. Similarly, in an environment of mergers and acquisitions the question of whether we will be around in 100 years can also be a challenge. I believe we are capable of constructing good and credible answers to those questions and challenges, particularly in partnership with colleagues and local community foundations.
As a network of agencies within the Alliance, we might even be able to leverage our collective power to further address those issues and concerns. We may be able to provide some of the sophisticated planned gift vehicles as a national collective, where most of us would be financially challenged to do it on our own.
As the Chinese proverb admonishes, a trip of 1,000 miles begins with a single step; so too do planned giving campaigns begin with a small step: one gift at a time. Gift upon gift builds momentum and credibility, securing and endowing the future of the mission. Enjoy the journey.
Bob Jones is chair of the Alliance’s Resource Development Services |  |
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