The following guest blog post is from philanthropy researcher Russell N. James III, JD, PhD, CFP®. He originally posted it on LinkedIn, and I’m reposting it here with Russell’s kind permission. I’m reposting the piece because of the enormous importance of the subject and the valuable information it contains.
Engaging donors in planned-giving conversations is still possible during the coronavirus pandemic. Last week, Russell and I shared our FREE whitepaper “Legacy Giving: The Best of Times or the Worst of Times?” Now, I want to share Russell’s 10 charitable planning strategies you should keep in mind when seeking complex and major gifts during these challenging times:
The market went down. A lot. The economy is temporarily frozen. Unemployment may increase dramatically. In the past, all of these things have been bad for charitable giving. We can’t control that. So, what can we control? What strategies make sense for fundraising, in particular for complex and major gifts?
Here are ten charitable planning concepts to keep in mind.
1. Crisis is the time to show support
A social/friendship/family relationship encourages sharing. A transactional/market/exchange relationship does not. We see this in fundraising experiments where family language (simple words and stories) consistently outperforms formal language (technical words and contract language). One of the defining moments that identifies a friendship relationship, rather than a transactional relationship, is during a crisis.
In our personal lives, we know this. When you might be in trouble, a good friend is one who reaches out to help. A friend visits you in the hospital. A friend comes to the funeral with you. A friend listens whenever trouble strikes. In time of crisis, reaching out with concern, help, or even a relevant gift reinforces this social/friendship/family type of relationship.
Ideally, the first contact with donors in a time such as this should begin with concern. Are you OK? Do you need anything? Can we help? Later, we can return to the typical donor-charity dynamic. (If you represent a cause related to public health or COVID-related assistance, that return may happen more quickly.) But, first we want to show friendship-like support during a time of crisis.
2. The first giving conversations should be with DAF-holders
Requests made to donors with funded Donor Advised Funds will be successful earlier than requests made to others. During times of downturn and uncertainty, people are more likely to hold tightly to their wealth. This drives down charitable giving. But distributing funds already in a DAF doesn’t affect personal financial security.
During the last major economic downturn, many private foundations temporarily increased their distributions to help soften the blow for their grantees. The same reasoning can apply to individual donors who have already funded their DAFs. Due to tax planning strategies, many may have placed multiple years’ worth of future expected donations into a DAF. Given the current crisis, it makes sense to consider this as a time to empty those accounts earlier than originally planned.
3. One-time special requests work, but be careful with a crisis
In fundraising experiments, people are more willing to donate in response to a special, one-time need than for ongoing needs. An appeal for one-time needs that arise as a result of the current turbulence may be particularly effective. In experiments, people respond more to appeals during a time of crisis. We are all sharing this experience together. We can work together to help overcome the effects of this hit.
However, it is important in such appeals to identify the crisis as a crisis for beneficiaries or for the cause, but not an organizational crisis. Projecting organizational instability might help get the $50 gift today, but it will come at the cost of the major donation later down the road. Major philanthropic investments don’t go to unstable organizations.
4. Use planned gifts as your “Plan B”
During times of downturn and uncertainty, people are more likely to hold tightly to their wealth. Planned giving opportunities can help “lean into” this uncertainty.
Estate gifts take place only after the donor no longer needs the money personally. They can also be revocable. They can be a percentage of the estate, and thus can vary in size with financial ups and downs. These percentage gifts are actually much better for charities because they usually end up being much larger. (Fixed dollar gifts tend not to get updated for inflation.)
Irrevocable planned gifts can also help with financial uncertainty. These typically give the donor lifetime income or lifetime use of the donated property. Thus, the gift can be made while still protecting the financial security of the donor.
If a donor needs to back away from a commitment or feels that a future ask is too daunting, consider planned gifts as a “Plan B”. A response to such a refusal might include revocable or irrevocable planned gift options.
I certainly understand your concerns. I know others in your same situation who have decided to move their commitment into an estate gift instead. This provides flexibility with no upfront cost. There are even ways to do it that provide tax benefits. Would you be interested in learning more about these options?”
[This is followed by discussion of: 1) Gift in a will. 2) Beneficiary designation on an IRA/401(k), avoiding income taxes that heirs would otherwise have to pay. 3) Retained life estate, creating an immediate income tax deduction, discussed below.]
I certainly understand your concerns. I know others like you who have decided instead to make a gift that gives them lifetime income. With interest rates being so low and the market being so volatile, many people like the fixed payments coming from a charitable gift annuity. Would you like to learn more about this?”
5. A charitable gift annuity as a two-stage gift
For those representing stable institutions offering Charitable Gift Annuities (CGAs), this may become a particularly attractive gift. A CGA usually trades a gift for annual lifetime payments to the donor (or donor and spouse). During times of uncertainty, the guarantee of fixed payments from a stable institution can be attractive. Following the last dramatic drop in the market in 2008, some large, stable organizations reported receiving exceptionally large CGAs. These very large gifts would normally have been structured as a Charitable Remainder Trust. But during extreme volatility, donors instead preferred the certainty and stability of payments guaranteed by the organization rather than payments tied to investment returns.
A charitable gift annuity can sometimes be presented as a two-stage alternative when uncertainty prevents a normal gift from being made.
I certainly understand your concerns. Another donor like you was in your same situation and she decided to protect against all this volatility by making the gift in two stages. First, she made a gift that gave her annual payments for life. If things go downhill, she has that income. But, if everything turns around and she ends up not needing the extra money, then she can donate those future payments as a second gift.”
Section II: Wonky Charitable Tax Planning Opportunities
There are now special planned giving opportunities from temporarily low-interest rates.
The Fed has cut rates to zero. The T-bill and T-bond rates have collapsed as money flees the stock market volatility. Expect to see all-time low §7520 rates. (This is the rate used for charitable deduction calculations in complex gifts.) BUT. At the same time, the Fed is engaging in quantitative easing. The federal government is engaging in massive new spending. When the effects of these interventions hit, expect to see those rates bounce back up. This creates what will be an unprecedented, and likely brief, opportunity to take advantage of historically low §7520 rates in planned giving. Be ready to talk with donors about these planning options, because the window may be short.
6. A charitable gift annuity if you act fast!
The deduction for a charitable gift annuity is the amount of the gift less the estimated value of the annual payment. The value of that payment is based on the §7520 rate. The tax law allows the donor to choose the current or either of the prior two months’ §7520 rates for this calculation. The February rate was 2.2 percent. The March rate was 1.8 percent. The April rate is 1.2 percent. The May rate will probably be lower still. But, the February rate will still be available to use until the end of April.
Let’s look at an example. Suppose a donor, age 55, donates $100,000 for a charitable gift annuity paying $4,000 per year. (This matches the current ACGA rate of 4%.) The charitable deduction for that gift using the April rate is $14,340. Using the February rate it is $25,277. This February rate is still available until the end of April. Making this gift before the end of April means a 75% larger deduction! The bigger deduction is available, but donors must act fast.
(Technical note: If §7520 rates fall below 1 percent, that gift would no longer be possible. The payment rate would have to be reduced. Otherwise, the deduction would then be less than 10% of the transfer. This means the transaction would not qualify as a charitable gift annuity.)
If the donor can’t use charitable tax deductions, then the situation reverses. The lower §7520 rates are actually better because a larger share of the annual payments will be considered as tax-free return of the original investment. (The original investment is the amount paid for the CGA less the charitable deduction. As the deduction gets smaller, the original investment gets larger.)
To learn more, see chapter 9 here: http://www.encouragegenerosity.com/VPG.pdf
Or watch videos 30-33 in this YouTube series: http://bit.ly/TexasTechProfessor
7. Retained life estate gift in homes and farmland
A donor can get an immediate tax deduction by donating the inheritance rights in a personal residence or farmland to charity. This is done by signing a deed that transfers the “remainder interest” to the charity and retains the “life estate” for the donor. The amount of this tax deduction depends upon the §7520 rate.
Suppose a donor, age 59, donates the inheritance rights to $100,000 of farmland. When the §7520 rate was 11.6% (in May 1989) the deduction for this was $15,684. When the §7520 rate was 1.0% (in January 2013) the deduction was $80,479. That is a massive difference in the size of the deduction based purely on current interest rates. Lower §7520 rates mean bigger deductions for the identical gift. (Notice that this is the opposite result from a charitable gift annuity.)
Deductions for these gifts would also be higher because, unlike the stock market, the appraised value of homes and farmland probably hasn’t changed much.
To learn more, see chapter 11 here: http://www.encouragegenerosity.com/VPG.pdf
Or watch videos 37-41 in this YouTube series: http://bit.ly/TexasTechProfessor
8. An “estate tax planning” charitable lead trust
Although few and far between, some estates are large enough to pay estate taxes. These donors can take advantage of a non-grantor CLAT (charitable lead annuity trust). This is a tax-efficient way to gift assets to heirs. The donor transfers assets to the CLAT and the CLAT pays an annual fixed amount to charity for a set number of years. Any amount remaining at the end goes to selected heirs.
Here is the trick. The donor pays gift taxes on the amount ESTIMATED to go to heirs, not on the amount ACTUALLY transferred at the end. This estimate assumes that the investments will earn the initial §7520 rate during the entire term of the CLAT. Any amount earned above that initial §7520 rate is transferred tax-free to the heirs. This makes CLATs particularly attractive during a period of temporarily low-interest rates.
To learn more, see chapter 13 here: http://www.encouragegenerosity.com/VPG.pdf
Or watch videos 55-58 in this YouTube series: http://bit.ly/TexasTechProfessor
9. An “income tax planning” charitable lead trust
A grantor CLAT allows a donor to take an immediate tax deduction for many future years’ worth of donations. The donor transfers an asset to the CLAT large enough to pay for the future donations. At the end, the donor gets back whatever is left over after the donations.
Suppose a donor funded a CLAT that would pay $10,000 per year to charity for 20 years. After this, any remaining funds come back to the donor. The donor gets to take an immediate tax deduction for all of those gifts. But the size of the deduction depends upon the initial §7520 rate. When the §7520 rate was 11.6% (in May 1989) the deduction for this gift would have been $76,607. When the 7520 rate was 1.0% (in January 2013) the deduction for this same gift would have been $180,456. Lower §7520 rates mean bigger deductions for the identical gift.
See https://www.iclat.net/ for more explanations and practical solutions.
10. A “charitable swap” still works – even in a down market
In a “charitable swap” a donor gives appreciated stock instead of cash. The cash that would have been donated is instead used to immediately purchase identical replacement stock. (There is no waiting period. The wash sale rule does not apply because this is gain property, not loss property.)
The stock portfolio doesn’t change at all. But, the capital gain is wiped out of the portfolio because the old stock (with gain) is removed. It is replaced with identical new stock purchased at current prices (no gain yet). This swap can be done even in a down market. As long as the donor still has some stocks that are worth more than what the donor paid for them, this still works. Because it doesn’t change the portfolio, it works even for those not planning to sell during this down market.
Encouraging donors to give appreciated assets from wealth (like stocks) rather than just cash from income benefits the donor. It also benefits the charity. Charities that encourage such gifts see much greater long-term growth in fundraising than charities that don’t. Want proof and explanations? See https://doi.org/10.1002/nml.21334 (or send me a note to get the full technical paper)
Conclusion
Whenever possible, we want to lead by providing value. As we begin to phrase conversations and communications, it is often best to take the role of a helpful, knowledgeable advisor, rather than leading with a request. And indeed, there are many new opportunities and strategies available for donors resulting from the market situation (discussed above) and new changes in tax law in both the SECURE act and CARES act, see https://www.linkedin.com/pulse/4-things-fundraisers-need-know-secure-act-james-j-d-ph-d-cfp-/ and https://www.linkedin.com/pulse/secure-acts-above-the-line-charitable-deduction-russell/
Given the sensitivity of communicating during such a turbulent time, it makes sense to focus on “permission” marketing. In other words, make sure they are interested before you start over-sharing! In conversation this might be something as simple as,
This is such a crazy time right now. I’ve been busy sharing with others how to be smarter about their giving with all of this volatility and the new tax law changes. It’s actually opened up some new planning options that we didn’t have before. If you’re ever interested in learning more, just let me know.”
Finally, in legacy fundraising, I often suggest, “If you want a larger audience, don’t lead with death.” This is because most people, most of the time will react to death reminders with avoidance. In experiments, avoidance responses get stronger after people have already experienced previous death reminders. We are currently surrounded by constant death reminders in the media. So, the negative reaction to leading with death will likely be even stronger than in normal times. Thus,
1. opening with non-death related topics (e.g., how to give smarter),
2. asking about interest / asking for permission (e.g., would you be interested in learning more?), and
3. only then covering both current and estate giving options will be safer than leading with “death planning.” (Of course, if they openly want to talk about estate planning, you don’t need such oblique approaches.)
Shocking economic downturns hurt charities. There are no easy answers. But, we can still do our best to provide guidance, wisdom, planning, and concern for our donors, even in times like these.
Yes, these are challenging times. They are unusually challenging times. Yet, despite the difficulties we all face, there are opportunities to promote and secure planned gifts. The keys to success are knowing what those opportunities are and how to speak with donors about planned giving. For further insights and tips, be sure to download the FREE white paper that I co-authored with Russell: “Legacy Giving: The Best of Times or the Worst of Times?”
That’s what Russell James and Michael Rosen Say… What do you say?
Michael Rosen Says... 
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