Dying to Know How Much Bequest Income Your Charity will Receive?

I always enjoy hearing from my readers. Sometimes, they give voice to questions that I suspect many others have as well. For example, I heard recently from the Development Associate of a small nonprofit organization:

Hi, Michael. I enjoy your posts and blogs very much. Do you know of any statistics which tell how long it takes to see any benefit from a planned giving program? I work at a small organization and they want to put a dollar amount to be raised in the annual fund raising plan. Doesn’t common sense say you cannot expect a definite planned giving amount EVERY year? We are very small and really only capable of pursuing bequests. Are there statistics to support this in writing that I could use to share with my Board and CEO? Many thanks for all your informative and helpful posts!”

Regarding the first question about how long it will take a new planned giving program to become effective, I’ll provide the standard consultant’s answer: It depends. I’m actually not being flippant. The answer depends on a great number of variables including, but not limited to:

  • How many planned giving prospects are there?
  • How educated are they about planned giving?
  • What is the quality of the relationship that the organization has with prospective planned gift donors?
  • How old are the prospects?
  • How healthy are the prospects?
  • Do your prospects tend to have children and grandchildren?

The good news is that while we cannot easily predict when an organization will begin to benefit from a bequest giving program or how much money the program will produce by a particular date, we do know that the organization will benefit sooner as well as later. Even with deferred commitments such bequest gifts, charities will often begin to see a return within three to five years.

The Wizard by SeanMcGrath via FlickrThe second question also does not lend itself to an easy answer. However, as the Development Associate suspects, it is “common sense” to say that most organizations “cannot expect a definite planned giving amount EVERY year.”

Nevertheless, I know that this issue is not limited to this particular charity. I also know that it’s not limited to small charities. Not long ago, I learned of a much larger nonprofit organization that always budgets to receive $1 million of bequest revenue annually despite the objections of the group’s planned giving specialist.

So, what is the answer? How much, if anything, should organizations budget for planned giving support?

While large organizations with mature development programs might be able to forecast planned giving revenue with some degree of accuracy and safety, there is no way a small organization with no significant prior planned giving experience can do that. Budgeting on bequest revenue is generally problematic for the following reasons:

  • You don’t know how many individuals have already made a bequest commitment but simply have not told you.
  • You don’t know how many people would be willing to make a bequest commitment.
  • You don’t know how many people who have made a bequest commitment have changed their will to remove the charity.
  • You don’t know when people who have made a bequest commitment will die. While actuarial tables can provide some hint at this, the reality is that such tables are more reliable with larger groups rather than single individuals.
  • Many people who are willing to make a bequest commitment will not tell you the amount of that commitment. If the commitment is a percentage of estate, the donor will likely not even know how much will end up in the charity’s hands.

In short, with bequests in particular, there are too many unknowns. For a new planned giving program, regardless the size of the charity, projecting bequest revenue figures would simply be guesswork. Even for larger organizations with an established gift planning program, budgeting for planned giving revenue can be risky. For example, I know of one organization that budgeted for planned giving revenue but came up short resulting in an operating deficit. Ouch!

Setting a planned giving goal is one thing. Budgeting on planned giving revenue is an entirely different matter. While it is perfectly reasonable for the organization to set process goals (i.e.: number of planned giving conversations, number of events, etc.), it will be difficult to set a reasonable dollars-in-the-door goal unless the planned giving program is well established and the donor file is large enough.

Debra Ashton, in her book The Complete Guide to Planned Giving, suggests setting a goal by looking at the average bequest revenue received each year over the past five years and then adding five to 10 percent to that average. If there were any extraordinary gifts in that five-year period, you will probably want to remove them from the calculation. Again, this involves setting a goal and not a budget figure.

Others have suggested a more conservative approach involving a look at the average bequest revenue over the past five years and then subtracting five to 20 percent.

Larger organizations with an established planned giving program and a robust list of donors who have made a bequest commitment might be able to set reasonable revenue goals. However, before converting those goals into budget expectations, the organization should ensure that conservative numbers are used. It’s far better to be pleasantly surprised at the end of the year than faced with a revenue shortfall that results in an operational deficit.

By contrast, smaller organizations and those with new planned giving programs are dealing with too many variables and too many unknowns to be able to safely predict outcomes. Setting an aspirational goal is one thing, budgeting for the revenue is a very different matter.

There is another issue contained in the inquiry I received. The Development Associate believes that her small organization must limit its planned giving program to bequests. However, there are other types of simple planned gifts that any organization can seek beyond bequests:

  • Beneficiary designations are an easy way for donors to make a gift commitment without the need for a lawyer. For example, a donor can designate all or a portion of an asset to the charity (i.e.: a life insurance policy, an IRA, real estate, etc.). The regulations associated with beneficiary designations will vary by state.
  • Stock gifts are considered by many, including myself, to be a type of planned gift. Gifts of appreciated securities are good for the donor and the organization. And they are easy to arrange.
  • Whenever Congress gets around to approving it again, IRA gifts will be another option.

So, how does your organization set goals or budget for planned giving revenue? Tell me below.

Finally, I want to thank my reader for contacting me with her questions. If you have a question or a suggestion for a future blog post, I invite you to contact me. I take requests.

That’s what Michael Rosen says… What do you say?

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16 Responses to “Dying to Know How Much Bequest Income Your Charity will Receive?”

  1. Thanks for sharing the question, Michael. Your reader seems to suggest that bequests are needed to cover this year’s (or next year’s) expenses. I think a wiser policy (from fiscal, programmatic, and fundraising perspectives) is NOT to spend a bequest in the year it is received. Most of us don’t have the luxury of socking away planned gift revenue in endowment — and with interest rates as low as they are now, how much of a luxury is that, anyway? But, what about spending 1/3rd of a bequest over each of the three years following its arrival? Or 1/5th a year over 5 years?

    That evens out the bumps in an income stream that is inevitably chaotic, which is good fiscal policy. It allows the organization to plan for ups and downs in income, which makes for better programming. And it conveys to donors that bequests are treated as something special, which doesn’t just evaporate into the operating budget.

    Paul Jolly
    Jump Start Growth

    • Paul, thank you for sharing an interesting idea about how to manage planned gift revenue. What you’ve outlined is a nice balance between using the funds immediately versus placing them into an endowment. However, many organizations will have a tough time resisting the urge to spend the money as it comes in; this is likely to be especially true for charities dealing with life and death issues. I’m not necessarily opposed to organizations using bequest dollars on the schedule you’ve suggested or even immediately; I just don’t think, in most cases, that those dollars should be budgeted unless they are a cash-in-the-door carry-over as per your plan. If more revenue is generated than what was budgeted — organizations are allowed to go over goal — the organization can spend more on mission fulfillment. They just shouldn’t count those chickens before they hatch.

  2. Michael,

    Interesting post. I definitely agree that planned giving should not be included in your annual budget. I can just picture a development director, executive director and the board sitting down and discussing how many donors must die in the fiscal year to make the annual budget work. If a planned giving program is started, the funds generated will eventually come, but with people living longer lives due to better medical care and technology, it may be a long wait.

    • Richard, thanks for commenting. You’re right. Development staff meetings can get a bit ghoulish (particularly at hospital foundations) when the discussion turns to speculation about the timing of the demise of donors. It’s not exactly donor centered. Or, maybe, it’s entirely too donor centered. 🙂

  3. Unfortunately, many organizations are in a “eat what you kill” mindset – I often hear “well, we took a five year rolling average of bequest revenue so it’s ok to put that average as a revenue goal for next near.” Of course, there may have been wildly varied distributions in any of those years, and if the organization is counting on that money to make their budget and cover their expenses for that year, they’d be in trouble. Not to mention the fact that they aren’t increasing their reserves or endowment.

    • Tracy, thank you for sharing your thoughts. You’re right. There is an enormous temptation for organizations to adopt an “eat what we kill” orientation. I suspect this is particularly true for charities dealing with life and death issues. You can imagine board members asking, “Is it okay to let someone die today in order for us to build our cash-reserve to ensure financial stability tomorrow?” It’s a difficult decision to make. However, even if a charity chooses to spend bequest revenue as it is received to meet current needs, it’s an entirely different matter to budget for those dollars. Expecting a steady stream of realized bequest revenue based on wishful thinking or an unrealistic, misunderstood, and unsustainable multi-year average is dangerous. You’re quite correct to recognize the difference between goal setting and budgeting. Organizations that budget for bequest revenue might get lucky for a year or two, but it’s only a matter of time before they come up short and end up throwing the entire organization into turmoil as a result. While there are certainly some organizations that can safely project bequest revenue, the vast majority would be well advised to exercise extreme caution. Thanks again for sharing your on-target insights.

  4. My organization treats all unrestricted bequests and terminated life income gifts as board-designated endowment. Since this policy was implemented, we have raised more than $50 million in such funds, which throw off more than $2.5 million for operations each year given our 5% endowment draw. $2.5 million was the amount of bequest funds that formerly went directly into the annual operating budget. Board can choose to re-characterize these funds in the future (and has done so in at least one instance here to help fund a new initiative). So glad we made the change–worth trying if your program generates a consistent stream of revenue (our most recent five-year rolling average is $14 million) and you want to build your endowment. Now I am trying to get the powers that be here to measure my performance on the number of new expectancies and prospect contacts, which will keep our pipeline full for my successors. John Bacon, The New York Public Library

    • John, thank you for sharing your success story. Bravo! As a result of the board policy, The New York Public Library is able to budget on a reliable revenue stream resulting from planned giving, though by way of the endowment. Clearly, your organization values gift planning for donors and wise financial planning for the organization. By continuing to build the pipeline, you are definitely working to help future-proof the Library. Well done!

  5. Good article, Michael. Another reason not to budget for bequests is that they often get hung up in the estate/probate process for a long time. For example, my organization was notified of a bequest from a deceased donor in September of 2011, so we budgeted for it to come in during 2012, but it just kept getting delayed and delayed and we didn’t actually receive it until 2014.

    We used to budget an average of previous years’ planned gifts. However, being that we don’t have a mature planned giving program, a few years ago we stopped and put zero in the budget for the reasons you outline above. While it initially put a strain on our budget (i,e. where are we going to come up with these monies?) it was hands-down the right thing to do, and now when we do get bequests it goes in the “upside” column.

    • Nick, thank you for sharing your insights and providing another valid reason for not budgeting bequest revenue. Yes, the probate process can take an unexpectedly long time even when it goes smoothly. If the will is challenged, it could take years longer before beneficiaries receive anything. While your organization experienced some initial strain when it stopped budgeting for bequest revenue, it was still far better off than if it had budgeted for bequest revenue that was never realized; that would have been far more painful, as I know you know. Now, your organization is in the terrific position where every realized bequest gift is an “upside.” Well done!

  6. When I was Chief Dev. Officer at East TN Children’s Hospital, ’84 to 2010, our CFO & I agreed to use a running 10 year average of bequest payments as a number for budget projections. It worked quite well, we were at $850k/yr in cash flow from bequests at that time.

    • David, thank you for sharing your experience. If an organization has a long enough track record and a large enough donor pool, it is certainly possible to forecast bequest revenue with some accuracy as you discovered at East Tennessee Children’s Hospital. The key is for nonprofits to be cautious and to carefully consider the variables in order to minimize risk.

  7. Great post, Michael, and always an important subject to confirm the understanding of, especially at the board and executive level.

    We recently had a new client come to us looking for guidance on how to dig themselves out of a hole that was created by the previous leadership, as they had “budgeted” for planned gift revenue using a rolling 5-year average. Unfortunately, this organization has nowhere near the history and/or commitment to planned giving to give them an accurate planned giving goal based on a 5-year average, let alone a budget! Nonetheless, they are going to have some tough decisions in the coming months.

    You can never assume that leadership “gets it” and (to your last comment) nonprofits must be cautious and consider all possible variables that may impact their revenue goals and budgets.

    • Nathan, thank you for your kind comment. Coming from you, it means a great deal to me. As I was writing this article, I kept thinking: Nonprofits have such a tough job to begin with, why do some insist on painting themselves into a financial corner that makes life even more difficult? I hope my post will help at least a handful of organizations to make the right decision when it comes to planned giving goals v. budgets.

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