Too Much for Charities to Bear?

As stock market seesaws, fund raisers fear year-end drop in major gifts

The volatile stock market has made some donors reluctant to give — and is prompting numerous charities to take steps to prevent what could be a significant downturn in giving this year.

While many fund raisers say that it is too early to tell if the teetering market will significantly influence giving, others say that market fluctuations have already caused some donors to back out of commitments to make large gifts.

“We’ve already seen a number of major gifts delayed,” says Alan Butterworth, a fund raiser at the Lutheran Church Missouri Synod Foundation, in St. Louis. “Donors are saying they want to wait and see what will happen with the market,” says Mr. Butterworth, whose organization helps churches, seminaries, and other religious institutions nationwide attract and manage planned gifts. Such gifts provide special tax incentives and, in some cases, payments to the contributors.

Outright gifts of securities and planned gifts involving stock donations are the most likely to be affected by the shaky market, although some fund raisers fear that donors’ tendency to make large cash gifts could also be negatively influenced. Market dives, particularly if they continue throughout the fall, could not come at a worse time for charities. The holiday spirit, plus the end of the tax year, combine to make the final quarter of the year the time when donors are most likely to give. Many charities get the biggest portion of their total contributions then.

The roiling market, which was shocked by a 512-point single-day drop in the Dow Jones Industrial Average last month, is causing one Vassar College alumna to put off a seven-figure gift indefinitely, fund raisers there say. “I think people are nervous, and I’m concerned,” says Cindy Sterling, the college’s director of gift planning. “When the market goes down and when it goes down hard like it did, it’s a stunner.”

Many fund raisers are far less pessimistic, however. They point out that the recent steep decline, in which the Dow at one point had fallen 20 per cent below its mid-July peak, appears to have been short-lived; the market has since made up some of the loss.

What’s more, they say, most donors who are considering making big stock gifts have been in the market for years. Because they’ve seen their portfolios appreciate substantially in the unprecedented bull market, which has charged steadily upward since 1990, they still have ample incentives to donate stock: Such gifts help them avoid the capital-gains tax they would incur if they were to sell the securities. What’s more, the donors get to take a charitable deduction for the amount the stock is currently worth.

Indeed, the market drop has inspired a few donors to go ahead and make arrangements for planned gifts to provide income — before their assets decline any further in value. One woman who had planned to give stock to the Jewish Community Federation, in Baltimore, for example, has gone ahead and made all the arrangements for her six-figure gift; now, fund raisers say, she’s simply waiting for the stock to reach a target price before authorizing its transfer to the federation.

“It’s quite logical, given her situation,” says Michael Friedman, the charity’s director of endowment and planned-giving services. “She needs to act quickly.”

Several fund raisers expect the market to have little effect on year-end campaigns to get gifts of stock and other big gifts. “We do not anticipate a real erosion,” says Davida Isaacson, director of planned giving at WNET/Channel 13.

The New York public-television station, which has been seeking outright gifts of stock in its on-air fund-raising drives for the past few years, has seen stock donations explode. Last December, for example, the station’s on-air campaign brought in $450,000 worth of securities, a 61-per-cent increase over the previous year.

But other fund raisers are not as confident as Ms. Isaacson. Since last month, they note, the market has seesawed up and down. Even if stock values have not entered a free fall, the fluctuation creates a climate of uncertainty that does not bode well for giving.

“People are more generous when they feel more financially secure, so a volatile market cannot be that good for giving,” says Peter Hero, president of the Community Foundation Silicon Valley, in San Jose, Cal. “People are fastening their seat belts for a bumpy ride.”

Many experienced fund raisers expect the market roller coaster to continue, given the deepening economic problems of Asia, Russia, and Latin America and the domestic political scandal that has engulfed the Clinton Administration.

“If you begin to have more crises like this, the U.S. market could go down another 1,000 points,” says Robert Shafis, director of planned gifts at the National Alzheimer’s Association, in Chicago. “Unless things clearly stabilize over the next couple of weeks, and there is no other bad economic news, a lot of folks will say they’re going to wait” on making a big gift this year.

Mr. Shafis says he remembers what happened when he was a planned-giving officer at a large religious institution when the bottom fell out of the stock market in 1987. “It had a dramatic effect,” he recalls. “People were still making gifts but very significantly less. It took us until well into the next year to see things start to recover.”

Some fund raisers are taking steps now to head off any decline in gifts.

Bruce Flessner of the fund-raising consulting firm Benz Whaley Flessner, in Minneapolis, says that his company will call a meeting to discuss the effects of stock-market fluctuations with about a dozen non-profit clients now engaged in capital campaigns, most of them in the early stages.

Consultants will encourage the charities to revisit the research they have done on potential campaign donors. Many of those prospective donors are feeling less wealthy now, he says, because they hold stock options, or they expected a windfall from now-delayed initial public offerings of stock in private companies.

He says he will encourage his clients to start identifying donors with other assets such as real estate, even though gifts of property are more difficult to process than donated stocks.

Stock fluctuations, he adds, “are a serious issue for a lot of charities. If you are going into a campaign, you’ll be less excited than you would have been last year, when a lot of folks were saying, ‘We should do a campaign because the market’s doing so well.’ ”

Some charities are tweaking their fall and year-end appeals to reassure potential donors and volunteers about the recent market dips.

The Jewish Community Federation in Rochester, N.Y., for example, is sending a newsletter to 200 volunteers who solicit gifts.

The newsletter features a chart that shows the market’s impressive gains over the last four years.

“We are using the message that even with a bad couple of weeks, we’re still better off long term — and better off than those we are helping,” says Larry Fine, executive director.

Other groups are trying to educate estate planners, brokers, and other experts about how the zig-zagging market could affect con sultations with people who have charity in their long-term financial plans. The Jewish federation in Baltimore hopes to get 100 or more financial planners to come to an educational luncheon meeting on charitable planning in a volatile market.

“We are not getting a lot of negative feedback on the market at present,” says Mr. Friedman, the planned-giving director. “However, we understand that in this climate you have to get past the psychology of the person on the other side of table whose portfolio has gone down.”

Like the federation, many charities are realizing that, with an erratic market, some types of giving strategies are likely to hold more appeal for donors than are others. Among them:

Charitable remainder annuity trusts. A charitable remainder annuity trust created with appreciated securities may be attractive to donors now: It provides a stable yearly income because payments to the donor are based on a fixed percentage of the asset’s value at the time it is donated.

That’s different from the income generated by another type of trust, the charitable remainder unitrust, in which payments to the donor are calculated anew each year, using a fixed percentage of whatever the asset is worth at that time. If the value of the investment declines on the market, so will the donor’s yearly income.

Until now, unitrusts have been quite popular with donors; many have seen their yearly income rise during record growth of the invested assets in the market.

But “people are reconsidering the type of vehicle they use; they’re more receptive now than in recent weeks to an annuity trust,” says Mr. Butterworth of the Lutheran Church Missouri Synod Foundation. “As people get older, they don’t want to deal with fluctuation; they like knowing what their income will be.”

Annuity trusts are advantageous for fund raisers, too, Mr. Butterworth says, because they eliminate “frantic phone calls” from donors worried about how market decreases could affect their trust payments.

Charitable lead trusts. Mr. Butterworth says that recent stock declines are causing his organization to pay new attention to charitable lead trusts, which are appealing to some wealthy donors who want to leave assets to children or grandchildren. With lead trusts, donated assets are invested and a certain percentage is paid to a charity for a period of years. After that, the remaining assets revert back to the donor or a designated beneficiary.

Donors who have seen substantial paper losses in stocks from companies that are likely to regain value on the market may find the lead trust more attractive now, says Mr. Butterworth.

If the stocks grow in value as predicted, the donor could end up leaving his or her heirs more than was originally put into the trust. At the same time, the “gift taxes” that the donor must pay in setting up the lead trust would be relatively low — because the stock is worth less money now and also because interest rates, which are used in calculating the gift tax, are also low.

Outright stock gifts. Some donors may want to use appreciated stock to go ahead and fulfill pledges and other charitable obligations now, especially if they believe that their assets are ripe for further declines. In addition to helping donors avoid capital-gains tax, which they incur on any growth above what they originally paid for the stock, donating securities also allows donors to conserve cash they might have otherwise used on a gift.

Bequests. A return to the basics of planned giving — simply promoting bequests — may help fund raisers stem giving decreases during periods of economic uncertainty. If donors are feeling too insecure financially to make a big gift this year, they may be willing to promise the same gift, or even a larger one, at their death.

At Lutheran Hour Ministries, in St. Louis, where a couple has delayed plans to give $300,000 worth of securities to set up a charitable remainder trust, fund raisers say that the donors may consider a bequest instead. “My approach is that they still want to make the gift, so let’s talk about a different one,” says Mark Weinrich, the director of gift planning. “I will go back and talk about their will.”

Like most charity leaders, Mr. Weinrich believes that the recent market swings, if they continue, will delay a significant number of gifts but not prevent them altogether.

“Donors who really love our charities,” he says, “are not saying they will not make the gifts. They are saying, ‘We’ll make them in a different form or later.’ ”