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Counting Revocable Planned Gifts in Fundraising - Return from Fantasy Island

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A presentation on approaches to counting revocable planned gifts for nonprofit organization fundraising.

Published in: Government & Nonprofit
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Counting Revocable Planned Gifts in Fundraising - Return from Fantasy Island

  1. 1. How should revocable estate gifts be counted? Return from Fantasy Island
  2. 2. Why count?
  3. 3. 1. To raise more money for important causes by identifying and rewarding the right behaviors Why count?
  4. 4. 2. To justify investment in planned giving fundraising Why count?
  5. 5. 3. To generate large numbers that will impress an unsophisticated audience Why count?
  6. 6. $ raised via channel/$ spent on channel v. direct mail, events, major gifts, corporations/foundations, annual gifts, etc. Estate giving has the lowest fundraising cost per dollar raised (highest “efficiency”)
  7. 7. So, why don’t organizations invest more in estate giving fundraising?
  8. 8. The agency problem The interests of the representative [the agent] differ from the interests of the represented person or entity [the principal]
  9. 9. The agency problem Will marketing planned giving help me if… • average time at one institution is 5 years or less? • compensation decisions are made annually?
  10. 10. If you are counting to justify investment in planned giving fundraising, then I am a counting agnostic
  11. 11. If you are counting to justify investment in planned giving fundraising, then if it works, just do it
  12. 12. Counting to generate large numbers that will impress an unsophisticated audience Misunderstanding • Time value of money • Timing of death • The revocable nature of the gift • Assets not controlled by the will • Valuing contingent gifts • Generating v. uncovering planned gifts
  13. 13. Counting to generate large numbers that will impress an unsophisticated audience My first job in planned giving…
  14. 14. Campaigns seeking disclosures v. generating gifts
  15. 15. When does a $228 annual gift “count” as $1,000,000? $1,000,000 policy age 31 female $228/year level premium. Misunderstanding risk of death
  16. 16. To raise more money for important causes by identifying and rewarding the right behaviors, it helps to know what a planned revocable gift is actually worth
  17. 17. What is the planned revocable gift worth? Certainty of gift today • Documentation • Understanding assets not controlled by will Certainty of gift tomorrow • Likelihood of revocation • Likelihood of gift size changing Spillover effects • Current giving • Conversion to irrevocable gifts
  18. 18. What information do we have? Certainty of gift today • Documentation • Understanding assets not controlled by will Certainty of gift tomorrow • Likelihood of revocation • Likelihood of gift size changing Spillover effects • Current giving • Conversion to irrevocable gifts
  19. 19. Reported wills are often unused 17% 38% 10% 18% 11% 6% Distributed estates where decedent reported having a signed and witnessed will (n=7,150) No will found Will probated Unprobated will: nothing much of value Unprobated will: estate otherwise distributed Unprobated will: trust distributed Unprobated will: other
  20. 20. What information do we have? Certainty of gift today • Documentation • Understanding assets not controlled by will Certainty of gift tomorrow • Likelihood of revocation • Likelihood of gift size changing Spillover effects • Current giving • Conversion to irrevocable gifts
  21. 21. 0% 10% 20% 30% 40% 50% 60% 70% 1993/4 to 2004 1995/6 to 2006 1998 to 2008 2000 to 2010 2002 to 2012 2004 to 2014 10-Year Retention of Charitable Estate Component 70+ 50-69
  22. 22. What information do we have? Certainty of gift today • Documentation • Understanding assets not controlled by will Certainty of gift tomorrow • Likelihood of revocation • Likelihood of gift size changing Spillover effects • Current giving • Conversion to irrevocable gifts
  23. 23. After making their plan, charitable estate donors grew their estates 50%-100% faster than did others with same initial wealth
  24. 24. The NCPG (2000) study showed that 90% of planned bequest donors don't change their plans Fiction Among those (avg. age of 58) WITH a charitable plan, 10% chose “Amount Decreased” when asked about their overall plan, “Has the amount of the charitable bequest ever increased or decreased?” Fact It showed that IF charity stayed in, plan changes decreased total charitable amount 10% of the time
  25. 25. What information do we have? Certainty of gift today • Documentation • Understanding assets not controlled by will Certainty of gift tomorrow • Likelihood of revocation • Likelihood of gift size changing Spillover effects • Current giving • Conversion to irrevocable gifts
  26. 26. $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000 Before -8 years Before -6 years Before -4 years Before -2 years Mixed After +2 years After +4 years After +6 years After +8 years AnnualCharitableGiving inConstant(InflationAdjusted)2012Dollars Giving Before and After Adding Charitable Beneficiary to Estate Plan9,439 observations from a nationally representative longitudinal study $7,381 average annual giving post-plan $4,210 average annual giving pre-plan +$3,171 average annual giving increase
  27. 27. 1. Dollars in the door 2. Face value + separate category 3. Face value + separate category + min. age 4. Present value as if irrevocable 5. Updating present value with revocation adjustments 6. Don’t (Instead, count fundraiser behavior only) Approaches to counting
  28. 28. Dollars in the door • Simple • Real • Highly variable • Typically unrelated to current effort and activities
  29. 29. Face value + separate category • Simple • Transparent communication with donors • Value is too high • No time value of money / age adjustment • No risk of revocation adjustment • Incentivizes working with financially inappropriate ages • Incentivizes “count it and forget it” donor abandonment
  30. 30. Why traditional counting doesn’t work Traditional fundraising measures the ENDING step of a process to generate money Planned giving fundraising measures the BEGINNING step of a process to generate money
  31. 31. Age at Will Signing (by share of total charitable bequest $ transferred) 76% 11% 13% 80s+ 70s pre-70 Australian data from: Baker, Christopher (October, 2013) Encouraging Charitable Bequests by Australians, Asia- Pacific Centre for Social Investment & Philanthropy - Swinburne University
  32. 32. Most realized charitable plans (in red) added within 5 years of death 38% 13%10% 39%43% 22% 15% 20% Estates $ Gifted
  33. 33. 1. Death feels near • Final pre-death survey • Decline in self-reported health • Diagnosis with cancer • Diagnosis with heart disease • Diagnosis with stroke • Becoming a widow or widower 2. Family structure changes • Divorce • First child • First grandchild • Becoming a widow or widower Plans destabilize when
  34. 34. Face value + separate category + age minimums • Simple • Mostly transparent communication with donors • Value is too high • Almost no time value of money / age adjustment • No adjustment for risk of revocation • Incentivizes working with somewhat less financially inappropriate ages • Incentivizes “count it and forget it” donor abandonment
  35. 35. Present value as if irrevocable • IRS remainder interest tables • Donor communication issues • Value is still too high • No adjustment for risk of revocation • Still incentivizes “count it and forget it”
  36. 36. Adjusting for risk of revocation • The value of an irrevocable gift is an upper bound for the value of a revocable gift, converging as death approaches • Discounting for risk of revocation by “double discounting” or choosing a higher interest rate generates features similar to directly estimating the annual risk of revocation and remaining life expectancy
  37. 37. Double discounting* 1. Multiply estimated gift amount by the IRS remainder value factor to adjust for age. 2. Multiply by the same factor again to incorporate risk of revocation. * This concept was invented by Mick Koster at Carnegie Mellon University $100k revocable gift (2% AFR) age 70 = $58,156 [IRS Remainder 0.76260 x .76260 = .58156] Reconfirmed by personal visit at 77 = $68,345 Reconfirmed by personal visit at 85 = $78,778
  38. 38. Updating present value with revocation adjustments • With either “double discounting” or higher rate, credit the change in value for each personal visit reconfirmation using constant rate • Ex: Value of $100,000 estate gift using 8% discount rate at age 60=$25,308, 67=$34,749, 73=$44,494, 79=$55,071, 85=$65,412 • Each reconfirmation ≈$10,000 credit
  39. 39. • Defensible value • Standard IRS tables • Incentivizes working with correct age, interest, and capacity • Prevents “count it and forget it” • Back office only (not for donor communication) Updating present value with revocation adjustments
  40. 40. Don’t count gifts (Just count fundraiser activity) • Avoids “count it and forget it” • Recognizes donor sensitivity in reporting or documenting • May capture effort rather than successful effort • May need to be combined with capacity and age to avoid less efficient effort • Doesn’t fit with traditional fundraising outcome metrics • May not generate exciting news
  41. 41. The right answer is what works for your situation. This depends upon the outcome you want to generate and your organizational environment. How should revocable planned estate gifts be counted?
  42. 42. How should revocable estate gifts be counted? Return from Fantasy Island

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