B Insightful

The Charitable Education Fund: A Proposed Giving Solution for a New Generation of Philanthropists

2009-08-18T07:12:00.000-07:00

by Jeffrey Briskin
Principal, Briskin Consulting

Charitable organizations are facing the toughest economic times in generations. With the recession causing the largest losses in endowment values in more than a generation and charitable contributions declining for the first time in over 20 years, many institutions are struggling to simply stay afloat.

At the same time, many wealthier donors, who, historically, contribute the largest share of annual contributions, are seeking charitable giving options that deliver a higher level of personal benefits. Not-for-profit organizations and financial advisors face the same challenge: How to encourage giving in an increasing pragmatic environment?

The recession takes its toll

The current recession is unlike anything most people have experienced in their lifetime. According to the 2008 NACUBO-Commonfund Endowment Study Follow-up Survey, the average endowment declined by nearly 23% in 2008. As a result, many organizations, including Harvard University, have laid off hundreds of employees and curtailed programs and services.

At the same time, the recession’s impact on the net worth of donors and their foundations and charitable trusts resulted in a 2% decline in giving from 2007 to 2008, according to Giving USA 2009. This was the first time giving has declined on an annual basis since 1987.

Changing attitudes among wealthier donors

More than half of the charitable donations each year are made by wealthy Americans, and their motivations for giving are largely altruistic. According to the 2008 Bank of America Study of High Net-Worth Philanthropy, giving by wealthy households is driven largely by a desire to give back to their communities and a long-term commitment to supporting specific causes.

Yet, at the same time, the Bank of America study also noted a pragmatic shift in donors’ decisions around charitable giving. In the original 2006 Bank of America Study of High Net-Worth Philanthropy, wealthy households turned primarily to not-for-profit personnel for charitable giving advice, with legal and financial professionals utilized far less often. In the 2008 update, these results are inverted, with donors relying mainly on accountants, attorneys, and financial advisors. And, in nearly all cases, donors initiated the discussion of philanthropy with their advisors, rather than the other way around.

What accounts for this shift? The 2008 Bank of America study suggests that it may be primarily tax-motivated. Avoiding capital gains and estate taxes and maximizing charitable deductions were cited as the primary reasons for establishing charitable giving vehicles. In addition, when asked what kind of giving vehicle they planned to open over the next three years, nearly 21% chose split interest trust and 18% chose charitable gift annuities, compared to 15% for private foundations, and 20% for donor advised funds offered by financial services companies or community foundations.

Of those who either had or were planning to start a split interest trust, 26% were attracted by these vehicles’ ability to deliver “personal benefits or income.” Only 5.4% chose a private foundation for this same benefit. This data indicates that many wealthy Americans wish to integrate private philanthropy into their overall wealth management and estate planning strategies, and are increasingly turning to financial professionals for ideas and solutions.

A ‘personal’ appeal

Given the current economic climate, financial advisors and development officers may need to recognize and respond to this growing demand for tax-advantaged giving vehicles that deliver personal financial benefits. However, traditional planned giving products no longer suit the needs of cash-starved organizations. Remainder vehicles such as charitable gift annuities and charitable remainder unitrusts do not deliver immediate financial benefits to the charity. Most are structured to generate taxable income for current beneficiaries (usually the donor or his or her spouse) over a specific term, at the end of which the remainder interest is distributed to the charity.

For institutions struggling for survival, 10-20 year ‘waiting period’ may be too late. And while charitable lead trusts do provide current income to not-for-profits over a designated period of time, they do not offer the same charitable tax advantages as charitable remainder options.

Is new thinking needed?

It may be time to consider revising the 1969 Charitable Giving Act, which codified the tax treatment of private foundations and charitable trusts, to allow for the creation of innovative new products that encourage giving and while providing charitable tax deductions and tangible personal financial benefits. Clearly, the creation of such products would face an uphill battle in Congress. But what if this option were designed specifically to create a connection between philanthropic education and higher education among the next generation of philanthropists—the children of wealthy Americans?

A possible solution: The Charitable Education Fund

The Charitable Education Fund (CEF for short) would combine the simplified grantmaking benefits of a donor-advised fund, the remainder benefits of a charitable lead trust, and the tax benefits of giving to charity.

A parent would establish a CEF account with a gift of cash, securities, or, potentially, tangible assets such as real estate. For tax purposes, these donations could be tax-deductible, allowing donors deduct a portion of the value of the gift and avoid paying capital gains taxes and estate taxes on the sale of these assets.

Once established, the parent would designate a child to serve as both advisor for and beneficiary of the fund. Fiduciary management of assets in the fund would be handled by a qualified institutional asset management company, bank, or investment advisor.

A hybrid grantmaking vehicle

Like a donor advised fund, a CEF would allow a donor-advisor—in this case the child—to recommend grants to qualified charities which would be distributed upon approval by the CEF’s board of trustees. Unlike a donor advised fund, however, the CEF would have to distribute at a certain percentage of the total value of its assets to charity each year. This combination of simplified grantmaking and mandatory distributions would encourage parents and children to identify and support charities and, more importantly, would prevent the CEF from being used as a tax shelter.

The educational benefit

The mandatory distribution component is essential, because the CEF would offer a significant remainder benefit. When a child matriculated to an institution of higher education, he or she could withdraw all or part of any remaining assets within the fund account to pay qualified tuition, lodging and other educational expenses. Withdrawals would not be subject to federal, state or local state income taxes, giving the CEF similar tax advantages as 529 plans and Coverdell Education Savings Accounts.

Any assets withdrawn from the fund that were not used for qualified education expenses could subject the parent of the child to income taxes and IRS penalties. This would help to protect against potential abuse of the remainder interest. Likewise, should the child not attend college—or choose not to withdraw assets from the account—the CEF would continue to make its annual charitable distributions until either the account was depleted or the advisor closed the account by granting all remaining assets to charity. However, the educational benefits of the fund would be non-transferable. This would prevent a parent from using one CEF to fund the education of other children or grandchildren.

Avoiding loopholes--overcoming obstacles

Any charitable vehicle that offers personal benefits has the potential for abuse, as we’ve seen in recent attempts by the IRS to end the use of supporting organizations as tax shelters and impose stricter penalties on infractions of the rules governing private foundations. Given its combination of personal financial benefits for both parents and children, a CEF would have to be tightly regulated to prevent similar abuse.

For example, the tax deductibility of donations to a CEF might might limited to 20% of adjusted growth income, like a private foundation. A minimum requirement of five years of annual charitable distributions might be established to prevent parents from donating assets a year or less before the child begins to withdraw assets from the account.

Grants from private foundations, charitable trusts and donor advised funds to a CEF would be prohibited. Conversely, a donor-advisor’s grant recommendations would be subject to the same guidelines governing grants from private foundations. Grants to political action committees or lobbyists would be prohibited. Grants to organizations that might result in self-dealing—for example, granting to a private foundation for which the parent serves as a paid director—could be prohibited as well.

Given these and other complexities, creation of the CEF would require significant changes to the 1969 IRS regulations governing private foundations and charitable trusts and the updated charitable provisions of the 2006 Pension Protection Act. Allowing for tax-free educational remainder distributions might also require changes in state tax codes, such as those that were instituted with the creation of state-specific 529 plans. Overcoming these challenges would be difficult, but not impossible, if a consortium of not for profit organizations, financial services companies, and tax specialists pooled their resources, energy and political capital to make it a reality.

Who would benefit most from a CEF?

Given that wealthy families generally can pay for their children’s higher education costs out of pocket, a Charitable Education Fund would probably not hold a great deal of appeal for them, especially as a donor advised fund would offer the same charitable and tax benefits with the added restrictions.

However, for the so-called ‘mass affluent’—households with investable assets between $250,000 to $1,000,000—the benefits of the CEF could hold a great deal of appeal, assuming a CEF account could established with a reasonable minimum donation of $25,000-$50,000 (the cost of a year of tuition at many private and public universities and colleges). For not-for-profit organizations faced with a drop in direct contributions, a CEF could offer a viable new planned giving option for wealthy benefactors. For financial services companies, accountants, attorneys and financial advisors, Charitable Education Fund could provide a powerful tool for helping families meet their financial objectives while encouraging parents and children to collaborate effectively to establish a lifelong commitment to giving.

Copyright 2009 Jeff Briskin. All rights reserved.

Engaging Volunteers as a Survival Strategy: Lessons from the Bank of America High Net Worth Philanthropy Study

2009-07-30T05:50:00.000-07:00

by Jeffrey Briskin, Principal, Briskin Consulting

According to the 2008 Bank of America Study of High Net Worth Philanthropy, nearly 40% of wealthy donors stopped giving to one charity and nearly 20% ended their relationships with four or more. The main reason they stopped giving was they no longer felt they had a personal connection with the organization.

In the current economic climate, with endowments struggling and donations dropping, organizations cannot afford to lose their most important benefactors. While newsletters, events, and direct mail are valuable tools for keeping donors informed, the best sustain their loyalty is to engage their hearts and minds directly, by offering them opportunities to supplement monetary donations with gifts of their time and expertise. According to the Bank of America study, donors who volunteer their time give more money, and support a wider range of causes, than donors who don't.

A drop in numbers, but a strong commitment in hours

Nearly three quarters of all respondents said they volunteer at least one hour per year. This figure represents a drop of nearly 15% from the 90% who said they volunteered in the original 2006 Bank of America Study of High Net Worth Philanthropy. While the average number of hours dropped between the 2006 and 2008 studies, mainly due a significant increase (from 10% to 25%) in the number of respondents who didn't volunteer at all, those who did volunteer were generous with their time. Over 50% volunteered 50 or more hours per year, and one in five volunteered 200 hours or more.

Applying their skills

Wealthy donors no longer limit their activities to fundraising and event planning; on average, they gave less than 50 hours per year to each of these activities. Instead, they apply most of their time to serving on boards (146 hours per year, on average). They provide, on average 95 hours of pro-bono work, and 132 hours for "other" activities that directly fulfill the organization's mission (such as serving meals or providing administrative support).

The more they volunteer, the more they give

There is a direct correlation between donations of time and money. The average donation increased with the number of hours worked: $47,845 for those who worked between 50-100 hours; $124,267 for those worked between 100-200 hours; and $132,315 for those who worked more than 200 hours. Even those who volunteered less than 50 hours per year gave more, on average ($45,318), than those who did not volunteer at all ($35,137). One possible explanation for this correlation is that those who can give more are probably wealthy enough that they can also give more of their time.

Recognizing the value of retirees

Given the value of the knowledge and skills wealthy donors can provide through their volunteer efforts, it's critical that organizations give donations of time and money equal weighting, particularly as the boomer generation reaches retirement age.

According to the Study, retired Americans contributed less ($77,151), on average, than those who were running a business ($130,498) or working for another company ($87,769). However, retirees volunteered more hours per year (277) than business owners (238) and workers (191 ours). With the recession decimating the wealth of many Americans, organizations that hold on to outdated practices--such as only offering board memberships to 'gold circle' contributors--may be missing out on a gift of much greater value--the professional expertise and commitment of significant time and retirees can provide.

Engaged in many causes

Donors who volunteer support a wider variety of causes (6-7) on average than those who don't (5-6). Donor-volunteers spread their time among a variety of organizations, making it imperative for organizations to create the kinds of opportunities that reflect these donors' interests and level of commitment.

Conclusion

In the past, development efforts focused on cultivating new donors. Today, retaining existing donors is just as important. Organizations need to maintain that personal connection with their most important benefactors. Engaging them as volunteers will not only help your organization demonstrate your "mission in action," but it will gave you the benefit of their skills and life experiences--a gift that may prove to be of far greater long-term benefit.

Holding on to Donors in Tough Times: Lessons from Bank of America's High Net Worth Philanthropy Study

2009-07-27T08:34:00.000-07:00

by Jeff Briskin, Principal, Briskin Consulting

In a time when contributions are decreasing, not-for-profit institutions have to "go the extra mile" to hold on to their most important benefactors.

Jeff Briskin served as Bank of America's project lead for the 2008 Bank of America Study of High Net Worth Philanthropy, the largest study ever conducted on the philanthropic attitudes and behaviors of wealthy America. The study, released in March 2009, has generated press coverage in The New York Times, The Wall Street Journal, the Chronicle of Philanthropy, Barrons, Newsweek, and many other periodicals. The full study can be located at http://newsroom.bankofamerica.com/index.php?s=23&item=105. Please note that the survey was conducted in the spring and summer of 2008, when the recession had already started but before the banking crisis of the fourth quarter.

Why do donors give?

The Study dispels the myth that the wealthy give primarily for personal benefit.

81% give to give back to their communities

70% give to support the same causes each year

70% give in alignment with their social beliefs

66% give to make an immediate difference (such as giving to a homeless person)

57% gave to remedy issues that affected them personally, such as cancer or the death of a loved one.

Less than 10% of respondents gave to further their business or personal interests.

What does this tell us? That wealthy donors think locally, are motivated to support causes over the long-term, and give primarily for results, rather than recognition. However, it should be notes that 66% said they give "when they feel financially secure," an important lesson in today's economy, when organizations can no longer assume that an individual's estimated wealth will automatically result in significant donations.

What do they expect in return?

Donors demand a high degree of accountability and responsiveness from the organizations they support.

93% expect the organizations they support to demonstrated sound business practices

88% want organizations to spent appropriately on overhead

83% expect a receipt for their donations

82% want organizations to respect their privacy by not selling their names

77% expect organizations to provide full financial disclosure

54% expect ongoing communication of results

Less than 11% seek public recognition or personal benefits from their giving

Given that this survey was conducted before the Madoff scandal and the market meltdown forced many not-for-profits to cut staff and reduce programs and wealthy donors to reduce contributions, we could expect an even higher demand for accountability if these same questions were asked today. These findings should be a wake-up call for implementing sound governance processes and communicating results.

Why donors stop giving

In tough economic times, the loss of a single wealthy benefactor can have a devastating effect on an organization's ability to carry out its mission. And, according the Study, many wealthy donors did stop supporting charities:

Nearly 40% stopped giving to one charity

Nearly 20% stopped giving to four more charities

What were the main reasons why they stopped giving to a given organization?

They no longer felt a personal connection to the charity (57%)

They decided to support other causes (51%)

They felt they were solicited too often (42%)

Curiously, only 14% said they stopped giving for financial reason. Again, it's important to keep in mind that this survey was taken in the summer of 2008. We could conjecture that this particular reason would jump significantly if the same question were asked today.

It's also interesting to note that in spite of the demands of donors for greater accountability, they felt, overall, that organizations were being run efficiently. Less than 15% said they stopped giving because of any mismanagement of donations or assets or other wrongdoing.

Lessons for not-for-profits

What does this data tell us? That wealthy Americans give primarily for altruistic reasons and to support their local communities. In return, they expect organizations to be demonstrate sound governance, to honor their wishes for privacy, to communicate results, and to keep them emotionally engaged. Organizations that fail to do this could lose these critical benefactors. In a time of increasing competition for a shrinking pool of donations, this is a risk few institutions can afford.

Next in the series: The importance of cultivating volunteers

About Briskin Consulting and Jeff Briskin

Briskin Consulting provides strategic marketing and sales process optimization services to help asset managers and investment advisors gain and retain clients more effectively.

The company was founded by veteran marketing professional Jeff Briskin, who has developed innovative marketing strategies, ecommerce initiatives, sales campaigns, interactive marketing initiatives, and training programs for some of America’s largest financial services companies, including Bank of America, Fidelity Investments, Pioneer Investments, and Columbia Management.

Jeff's ‘end-to-end marketing’ approach combines client research, opportunity analysis, value proposition development, sales process re-engineering and integrated online/offline marketing communications to help asset management companies deliver solutions that reflect each client’s unique challenges and opportunities.

Jeff also develops fiduciary and philanthropic education programs to help not-for-profit organizations improve organizational efficiency, understand federal and state regulations governing investment and governance practices, and cultivate donors more effectively.

For more information, please contact Jeff at jeffbriskin@hotmail.com.

What Keeps Not-for-Profit Investors Awake at Night? The Answers May Surprise You.

2009-07-27T07:27:00.001-07:00

By Jeff Briskin, Principal, Briskin Consulting

The not-for-profit world is facing its worst crisis in generations. Endowment values are down more than 25% in many organizations*, contributions are declining**, budgets are being slashed and personnel are being let go in record numbers.

As a result, many CFOs, CIOs and endowment investment committee members are looking for guidance and solutions from their banks, investment advisors, and asset management companies. Those companies that can provide this help are more likely to retain these clients, even in times of sub-performance.

What do not-for-profits want? Veteran institutional marketing professional Jeff Briskin can tell you.

For more than 15 years, Jeff Briskin has helped some of America's leading financial services companies win new business and increase market share through effective, client-focused marketing based on extensive research into the needs and attitudes of retirement and not-for-profit investors.

As the project lead for Bank of America’s trailblazing 2008 Bank of America Study of High Net-Worth Philanthropy, he helped change the way not-for-profit organizations and financial advisors cultivate their most important benefactors.

Jeff has leveraged this research experience to conduct a survey of CIOs and endowment investment committee board members in more than 100 not-for-profit institutions ranging from $5 million to $170 million in assets. These organizations include social service agencies, hospitals, educational institutions, and cultural organizations.

Unlike other surveys, which focus mainly on investment performance, Jeff’s research zeroes in on the psychological factors that affect decision-making—factors that could affect your ability to win new business and retain existing clients. Jeff is willing to meet with members of your sales and new business development team to share some of these findings at no-cost.

A sample of some of the insights Jeff will provide:

Nearly 80% have changed or plan to change two managers in 2009; a little over 30% have changed or will change 3-5 managers

Nearly 60% have revised their investment policy statement in 2009, and more than 42% intend to do so soon before the year is through

Nearly one in five plan to fire traditional product-oriented investment consultants and delegate investment management decisions to an outside advisors

While meeting total return goals is still a key concern for endowment managers, its importance has lessened between 2008 and 2009, while "meeting spending needs," "conducting proper due diligence" and minimizing reputational risk have become far more serious concerns than they have been in the past

While performance is still the most important consideration for selecting asset managers, not-for-profits are giving greater consideration to managers who can provide fiduciary advice and insights. can clearly articulate their investment process, provide exceptional client service, and use sales processes that focus on the needs of clients, rather than branding and products.

Jeff can offer you advice on how to apply these and other findings to help your company gain and retain clients more effectively—and what warning signs you must look out for that could lead to attrition.

About Briskin Consulting and Jeff Briskin

Briskin Consulting provides strategic marketing and sales process optimization services to help asset managers and investment advisors gain and retain clients more effectively.

The company was founded by veteran marketing professional Jeff Briskin, who has developed innovative marketing strategies, ecommerce initiatives, sales campaigns, interactive marketing initiatives, and training programs for some of America’s largest financial services companies, including Bank of America, Fidelity Investments, Pioneer Investments, and Columbia Management.

Jeff's ‘end to end marketing’ approach combines client research, opportunity analysis, value proposition development, sales process re-engineering and integrated online/offline marketing communications to help asset management companies deliver solutions that reflect each client’s unique challenges and opportunities.

Please contact Jeff at jeffbriskin@hotmail.com to set up a time for him to present findings from his survey to your sales and client service team.

*According to the 2008 NACUBO Endowment Study and 2008 NACUBO-Commonfund Endowment Study Follow-up Survey, the average endowment declined 22.9% in 2008, and those with between $500 million-$1 billion declined 25.5%.
**According to Giving USA 2008, contributions declined 2% between 2007 and 2008, the first decline since 1987.