Chapter 19
To Raise More Money, Think Cows
Many people think that the secret to successful fund-raising can be found in charity balls, with men in tuxedos and their trophy wives in strapless gowns. Wrong. The real secret to successful fund-raising can be found on the farm—the dairy farm.
We usually think of fund-raising in a very non-profit-centered way. The unspoken message goes something like this: Because we're doing such good work, you should give us money. It's puffed up with lots of words and bright smiles, of course, but underneath it all that's what we are really saying.
The problem with this approach is that it only gets half of the equation right. Yes, we are doing good work. That should be a given, because it's how the emotional connection gets made with donors. The IRS uses this connection as part of its test for the acceptability of tax-favored treatment for certain gifts. They call it donative intent, which must be present or else the whole gift might be seen as a shameless tax dodge.
Some development people stop right there. This is unfortunate, because the real power comes from linking donative intent with smart financial decisions. That's where the cows come in.
In economic terms, cows are fairly unique. Not only do they produce value during their lifetimes (milk), they produce it upon their death (beef). So a single cow has two inherent sources of value. If you think of donors' financial assets as being like cows, it will help you to understand how you can manage this dual value to everyone's advantage.
Donations
Donations are the low-hanging fruit of fund-raising, and everyone understands how they work. Donors keep their milk-producing cow during their lifetime, making a gift of some of the milk as they wish. The financial benefit to the donor, of course, is that he or she gets to deduct the donation from their taxes. The recipient organization gets the immediate—or present—value of the donation.
Bequests—Cow to Charity
Bequests are just like donations, with two exceptions. First, they happen only after the donor's death, which significantly dampens the joy of giving. Second, they benefit the donor by removing the value of the donation from the donor's taxable estate. The benefit can be substantial because high-net-worth individuals can pay a high percentage of their estate in inheritance taxes. In this case, the value of removing the cow from the estate is likely to be more than the deductible value of donated milk in any given year.
Charitable Remainder Trusts—Milk to Beneficiaries, Cow to Charity
For all other planned-giving vehicles, the cow and her milk get treated separately. The most common approach is the charitable remainder trust. The first item of note here is that word trust, because it indicates that the donated asset is irrevocably placed outside of the purview of the donor's estate (“asset” generally means a chunk of cash, stocks, etc., with income-producing potential). As with bequests, this removes the asset from the estate's taxable base, thereby avoiding the estate tax. It's called a charitable remainder trust because the charity gets the remainder, or what's left of the original donated asset after the trust beneficiaries get up to 20 years' worth of income.
There are two ways of getting the milk to the beneficiaries, and this defines the two types of charitable remainder trusts.
Charitable Remainder Annuity Trusts: The Same Amount of Income Each Year
To ensure that the beneficiaries get a fixed amount of income—“milk”—each year, donors will set up a charitable remainder annuity trust (regrettably known by the acronym CRAT). In this arrangement, the donor stipulates a certain amount that the trust will pay the beneficiary each year, with a minimum payout of 5 percent. The catch is that the payment is fixed and inviolate. If there is not enough interest income in any given year to cover the payment, the trust must make up the difference from the principal or leftover earnings from prior years.
Charitable Remainder Unitrusts: The Same Percentage of Trust Assets as Income Each Year
To ensure that trust assets are protected, donors can decide to give beneficiaries the same percentage of trust assets each year, an amount that will fluctuate with the current value of the assets. Again, the minimum payout is 5 percent, though the donor can stipulate that the distribution cannot exceed total income. Charitable remainder unitrusts have the advantage of allowing beneficiaries to benefit from the appreciation in the trust's assets, which helps outweigh their even more regrettable acronym of CRUT.
Charitable Lead Trusts in Which the Charity Gets the Milk, Beneficiaries the Cow
Flip a CRUT or a CRAT, and you get a trust in which the charity benefits every year, while the beneficiary benefits only at termination. Lead trusts can be structured as annuity or unitrusts, but the minimum payout and 20-year lifetime rules don't apply. One catch is that the donor cannot take an income-tax deduction upon creating the trust. The donor either gets a gift tax deduction if the lead trust is created when he or she is alive or an estate tax deduction if the trust is created upon his or her death.
In another type of lead trust, the donor holds on to some control over the assets. This allows for a tax deduction upon trust creation equal to the present value of the income interest gifted to the charity, but the donor must pay taxes on the amounts paid to the charity each year.
If this information all makes sense to you, it may be time to consider becoming a tax lawyer. For the rest of us, it's time to move on to other types of planned-giving vehicles.
Pooled Income Funds—Donors Put Their Cows in a Herd, Keep Rights to Milk
Okay, the cow thing is wearing thin. This will be the last one. In a pooled income fund, donors gift a future interest in an asset while retaining their ability to receive income from it. If this sounds like a charitable remainder trust, you've been paying close attention. The difference is that in a pooled income fund, the collective assets are professionally invested and the payout is determined by the performance of the fund, not by a formula against the then-current dollar value of the assets as is true in a remainder trust. So in this way, pooled income funds share characteristics with mutual funds.
There are a few other differences, too, one of the most important being that the beneficiary must receive the payout over his lifetime, not over a preselected term. And there is some protection for the asset because distributions are limited to the income of the fund so that the asset base will not erode.
Donor-Advised Funds
Donor-advised funds are one of the newest and fastest-growing kids on the block. As financial markets and associated instruments restructure on what seems like a monthly basis, new fund-raising threats and opportunities are sure to pop up. Donor-advised funds, for example, were barely on the radar screen two decades ago. These instruments allow donors to gain the advantages of a private foundation at a lower level of giving and without a lot of the associated expense. Donors gain tax advantages while directing the use of their donations.
Shrewd fund-raisers know that they are most effective when they can think like a donor. Their best problem solving is done on behalf of those who wish to give more effectively, not the intended recipient of the donations. There is no substitute for learning the financial rules of the game. It's all about cows.