Time Short for Using New Tax Breaks to Increase Charitable Gifts

Fund raisers should move quickly to make sure wealthy donors understand how they can benefit from new tax breaks in effect until year’s end, said speakers at the annual conference here of the National Committee on Planned Giving.

President Bush last month signed into law a measure that allows donors to write off up to 100 percent of their income for cash donations they made from August 28 until the end of the year. Members of Congress passed the measure to encourage people to give generously to hurricane-relief groups as well as to other organizations that might otherwise suffer a loss in donations because so many people want to help hurricane victims.

The tax break is significant: Usually donors cannot write off more than 50 percent of their adjusted gross income in deductions for charitable gifts.

Still, some fund raisers at the meeting, which drew nearly 1,300 people who specialize in arranging bequests and other gifts that offer tax and financial benefits to donors, complained that the new law doesn’t include a provision they have long asked Congress to authorize. The provision would allow donors age 70Z\x or older to transfer money from their individual retirement accounts to charities tax free, or to put IRA funds into a gift annuity that would provide them regular payments and leave any remaining funds to charity.

But Robert F. Sharpe Jr., a Memphis planned-giving consultant, said the new law does a better job of encouraging retirement-fund gifts, at least for the short term. Donors can withdraw IRA money with no penalty starting at 59Z\x, he noted, and the 100-percent deduction ceiling makes it more financially attractive for donors to take a large amount out of their retirement account and give it to charity. What’s more, the new law isn’t limited to IRA’s: Donors can make gifts from 401(k) and other retirement plans.

The new law also makes giving more attractive to donors who want to use stock to pay off their charitable commitments, Mr. Sharpe said. “This is like the Capital Campaign Pledge Payoff Act of 2005,” he said. Normally, donors save on their taxes by transferring stock that has grown rapidly in value directly to a charity, thereby avoiding capital-gains tax.

But with the 100-percent deduction ceiling in place, many donors would be better off selling their stock and making a cash gift to charity with the proceeds, because the savings from the charitable deduction would be worth more than they pay in capital-gains taxes, said Mr. Sharpe.

Charities should start identifying donors who could benefit from the new provisions and make them aware of the chance to make substantial new gifts, as well as the potential advantages of paying off their multiple-year pledges before January 1, speakers at the meeting here said.

However, Christopher R. Hoyt, a planned-giving expert who teaches at the University of Missouri, in Kansas City, said charities should be careful about telling donors that they can win generous tax breaks under the new law. Some states, he noted, do not allow people to take deductions for charitable gifts, so donors could end up owing large sums on their state tax returns if they had to report additional income from selling stock or making IRA withdrawals.

A big question among experts here is whether the 100-percent limit applies to donors who cash in stock or other assets to set up gift annuities before January 1. Under the new law, which aims to spur immediate gifts to charity, contributions to donor-advised funds, private foundations, and most charitable trusts are not eligible for the more-generous deduction. But because the money used to create a gift annuity goes directly to the charity, and the donor does not take a tax deduction for the income he or she receives from the annuity, Mr. Sharpe said, charitable annuities created by December 31 may be eligible for the more-generous tax deductions.

Charities may not be able to get as much money from bequests as they had hoped, in spite of researchers’ predictions that a transfer of wealth from one generation to the next will produce $6-trillion for charity in coming decades, said Mr. Sharpe, in a presentation at the meeting. He said that two of his clients, national charities with sophisticated efforts to raise money, are already receiving less from bequests than they had in the past, and two other big groups have seen bequests stagnate.

Economic, political, and demographic trends are contributing to the slowdown, he said. For example, on the economic front, declining stock values since the late 1990s have reduced the size of many bequests that leave a percentage of an estate to charity, he said. And for the next several years, the Census Bureau and other organizations have projected little or no growth in the number of people age 70 to 90, an age when many people decide to make bequests. Meanwhile, Mr. Sharpe said, competition for bequests and other deferred gifts has escalated. One sign is the number of local planned-giving councils, which provide training and other services to fund raisers who solicit bequests and other deferred gifts. They have grown from 13 in 1986 to 131 today, with a corresponding increase in members from 400 to more than 11,000.

To offset declining bequest income, said Mr. Sharpe, charities should work harder at seeking annuities, trusts, and other planned gifts from people who are nearing their retirement years but still do not feel ready to make a bequest. The goal with such donors, Mr. Sharpe said, is to obtain gifts that generate revenue for charity in the short term and avoid gifts that keep assets locked up for decades. People in their 50s and 60s, he said, should be encouraged to create annuities and “lead trusts,” which generate income for charity for many years, eventually providing income to a donor’s heirs.

He noted, for example, a couple in their late 50s who were asked to make a large gift to a charity but declined because they were worried about supporting the husband’s elderly mother. The charity encouraged the couple to create a gift annuity, which was designed to provide the mother with monthly payments for the rest of her life. They received a tax deduction that enabled them to free up enough income to make an immediate gift, and the charity also received the money left in the annuity six years later, when the mother died.

Nonprofit groups need to step up efforts with donors in the 75-to-85 age range too, Mr. Sharpe said. Many fund raisers fail to recognize that most elderly donors stop giving when their spouses die or they become ill, he said, and the charities let communications with those donors lapse, making a bequest less likely. Mr. Sharpe also said charities should reach out to elderly donors who have stopped giving and excuse them from regular solicitations, while at the same time finding ways to recognize them for the longevity of their giving or their cumulative donations. “Say a donor has put multiple charities in the will,” said Mr. Sharpe. “If appropriate, those groups should come together and throw the donor a birthday party.”

Fund raisers often make their organizations vulnerable to lawsuits and other problems because they do not make legally binding agreements with donors, said Kathryn W. Miree, a Birmingham, Ala., lawyer.

Lawsuits by disgruntled donors and their representatives are on the rise, she said. Under laws in most states, donors do not have a legal right to sue a charity over a contribution. But courts have allowed several lawsuits by donors, their family members, or representatives to go forward nonetheless, said Ms. Miree. “You need to know under your state law who has the right to sue.”

She cited a handful of cases, such as a pending lawsuit against Princeton University.

The university was sued in 2002 by relatives of a donor who made a multimillion-dollar gift in 1961 to establish a foundation, now worth about $650-million, to support a school that prepares Princeton students for foreign service. Unhappy with the declining number of graduates and management of the funds, family members of the donor, who has since died, asked the courts to redirect the money to other universities that can better carry out the donor’s intentions. Princeton denies any wrongdoing in the case, which is expected to go to trial next year.

Fund raisers subject their institutions to disputes over gifts, Ms. Miree said, because they are often reluctant to fully discuss and document what donors’ gifts will achieve — and what will happen if it becomes difficult or impossible to carry out those donors’ wishes.

One way to reduce the potential for controversy, she said, is to show financial advisers samples of carefully drafted agreements between donors and charities. Advisers often play a key role in arranging gifts, she noted, but they tend to draft agreements that focus on donors’ immediate expectations for a gift and contain few contingencies for changes that can occur years later.

For example, Ms. Miree said, a donor might specify that a large endowment be created to provide regular payments to a program that helps children succeed in school. But 20, 50, or 100 years from now, that program may no longer exist, she said. Or the fund may have become so depleted that it becomes too expensive to administer.

Far better, she said, would be for a donor to make clear in writing that ideally the money is to be used for a specific program, but if that becomes problematic, for other early-childhood education programs. The agreement should also spell out what the charity can do with the money if demographic, financial, or other conditions make it impractical to support early-education programs.

“Revel in the donor’s charitable vision,” Ms. Miree said, “but design the gift to outlive the vision.”

To counter concerns that some charities inflate the amount they raise from capital drives and annual funds, a group of fund-raising experts has developed a new approach.

The planned-giving organization asked several fund raisers to work on solutions to the problem, and Bruce E. Bigelow, founder of Charitable Development Consulting, in Frederick, Md., demonstrated one idea at the meeting.

Offering a sample spreadsheet, Mr. Bigelow said charities should keep three separate running accounts of annual or capital campaign gifts.

The first category would include all outright gifts of cash and other assets, such as stock or real estate, that a charity sells as soon as it receives it. In the second category, charities would place all pledges designated for the charity even though the organization might not receive them for many years, such as an insurance policy that names the charity as an official beneficiary or an irrevocable bequest. In the third category would be pledges made in a form that allow a donor to easily change his or her plans, such as an oral promise that the charity is in a donor’s will.

Charities would have more difficulty giving a running total for the third category since donors might not provide copies of their wills or other information, but fund raisers could state how many pledges of that type they have received.

As charities get money that has been pledged, they would add it to their total for outright gifts.

Mr. Bigelow said such an approach would avoid problems that arise because donors are offended by or don’t understand development reports that discount the value of their bequest or other gift to take inflation and depreciation into account. He said he hoped the approach would also make it clear to donors and others just how much money is on hand and avoid disappointment when dollars for critical needs remain unavailable because of the inevitable delays with bequests and other planned gifts.

The new guidelines for counting gifts, including the spreadsheet, are posted at http://www.ncpg.org/ethics_standards/NCPG%20counting%20guidelines.pdf.

Another new tool unveiled at the meeting is designed to help fund raisers evaluate offers by insurance companies that want nonprofit groups to take out life-insurance policies on their donors, said Craig C. Wruck, director of gift planning at the University of Minnesota Medical Foundation, in Minneapolis. Mr. Wruck led a group of experts who studied the insurance promotions to come up with recommendations.

Many companies have become skilled at marketing donor-insurance plans to nonprofit board members, executive directors, and others who may in turn put pressure on fund raisers to look favorably on the plans, which vary widely in how they are financed and other factors, Mr. Wruck said.

Some donor-insurance plans have been sharply criticized for earning more money for the insurance companies than the charities, and Sen. Charles E. Grassley, an Iowa Republican, has introduced a bill to crack down on insurance companies that gain undue benefits in charity deals.

But Mr. Wruck said concerns about insurance plans have led some fund raisers to dismiss deals that could offer significant financial benefits to charities.

To help fund raisers assess an offer, Mr. Wruck and his colleagues have produced a five-step approach. Each stage contains questions nonprofit officials should ask before agreeing to participate in donor-insurance plans. For example, Mr. Wruck said, charities need to decide whether they can afford to borrow money to purchase donor policies; that could limit their ability to borrow funds for other purposes. The evaluation tool is available at http://www.ncpg.org/ethics_standards/life insurance guidelines.pdf.