For advisors in philanthropy, the question has always been how to calculate and secure the current and future gift, ideally at the same time and from the same donor but without it having to be a philosophically competitive exercise. When it comes to endowment building, large donors are needed to contribute major gifts and help to continue and grow the philanthropic endeavor. The problem is that large donors are sought after by the entire non-profit world and by and large they are given the same charitable giving choices from development officers. Other than allegiance to an educational or medical institution, how do donors choose whom to give the major gift to? What is the level of differentiation between the non-profits? Is it the planning advice they give or the symbols of what they stand for? Lastly, the perception of charitable giving has with it a built in conservatism, so thinking/advising out of the box is a risky approach to secure high net-worth donors.
High net-worth donors have the options of private foundations, donor advised funds, CRT’s, CLT’s and so on. These charitable gift delivery structures are positioned to give donor tax deductions when the gift is irrevocably given away and according to the various rules, a charity receives a current or a deferred gift. (A Bank of America and Indiana University study found that when the ultra-wealthy were asked if changes in the tax code would alter their giving patterns, 92% said not at all.) Life insurance donations were always accepted but never encouraged and never brought into vogue as a major campaign driver even though the promise of a greatly inflated gift was guaranteed.
With all of these designs and concepts connected to charitable giving, what are the attractive leveraging strategies that advisors can provide for donors? Do we have creative ideas available that address the current gift but also plan the future endowment of greater magnitude without interference? Lastly, these extremely important questions need to be answered before those questions can be addressed; how much wealth does the donor leave his/her family, how much do they save for society and what is the social responsibility connected with being a wealthy citizen?
How did our best donors get there? Presently, 70% of big family fortunes are less then 13 years old according to a survey by the Harrison Group. The people who amassed these fortunes are entrepreneurs pursuing their passion, wealth is a by product of their passion. Wealthy people often make their fortunes after they make up their minds to solve a problem or do something better than it's been done before. Most high net-worth households are either somewhat satisfied, 44.8 percent, or very satisfied, 42.9 percent, with the impact of their charitable donations. No high net-worth households reported they were extremely dissatisfied.
How much is the best donor worth to his/her favorite charity? If they are incidental donors or volunteers, the answer is not much. But what if they are one of the top 500 best donors to their favorite organization, what is their value to the organization? What happens to that number when a donor dies? Does a donor’s worth to a charity cease to exist or does it endow at death? How do we amplify this annual gift and at what cost? What if your best donors gifted their excess insurability to charity with no additionally donor monetary outlay, what impact would that charitable strategy have on endowment building?
A planned giving strategy that is starting to get the attention of development officers is the ability to finance large life insurance policies with bank money on their best donors. When they finance the premiums of a life insurance policy, many flexible opportunities present itself perhaps for the first time. We know because of a recent Bank of America study that only 40% of the best donors are leaving a gift to charity in their will (perhaps because it would be taking away from the family legacy) and we also know that wealthy donors have said they would give more if “charities would spend more on helping their constituencies than on administrative or fundraising expenses”. Most charities do just that, they invite donors to put in place planned gifts that are administratively expensive, the gift does not pay off until the death of the donor and the amount of the gift is not guaranteed. The process is counterintuitive to the study results.
By financing the premiums for life insurance as an endowment building tool, we have shifted the expense for this type of transaction from the donor and the charity and placed that responsibility with the bank and into the policy. The administration of the plan is shifted to the design team. If a donor knows that their future philanthropy as well as their legacy to their family is secured using bank money to complete this goal, then the opportunity to discuss current gifting from a donor’s estate while alive becomes conversational and feasible. All this is possible as long as there is a viable way to pay back the loan and grow the policy using realistic assumptions to illustrate the possibilities for success.
A current gift allows a donor to enjoy their goodwill in this lifetime. But a planned gift allows the donor to view a futuristic sense of continuity and perhaps immortality through perpetuity. By leveraging the planned gift with a donor’s excess insurability and then having the capability to use bank financing to make that transaction happen, creates a sense of philanthropic possibilities for a charities best donors. Donors can continue enjoying the impact of their current gifts while knowing they have planned for a future guaranteed endowment. This is accomplished with the least amount of donor outlay and there is no expense to the charity for administration. This is an extremely key point in getting donor momentum; the BOA survey said high net-worth donors would give more if expenses were curtailed.
The success of this template is that it mirrors the business patterns a charities best donors employed while running their own businesses and creating their wealth. They are familiar with the risks associated with financing a project. If we can mitigate the risk of insuring a donor’s legacy to within a range that is consistent and acceptable to their existing business patterns, then we have created the logical basis for a leveraged approach to philanthropy and endowment building.
Financing the premiums for special life insurance policies that produce guaranteed future endowments is creating a planned giving paradigm switch. By allowing your best donors to keep their current gifting patterns in place while using their excess insurance capacity to guarantee an endowment, we have leveraged a single donation into a more dynamic result. Look for this trend to continue and grow as creative legal insurance designs finally become vogue in charitable giving.
Barry Goldwater is Principal of the Financial Resource Group, an insurance sales, marketing and design firm. He is a specialist in premium financing strategies as well as strategic relationship building with attorneys, CPAs and trust advisors. He is a seminar producer and has lectured to the CPA and attorney state societies on the topic of fiduciary responsibility and trustee liability and compliance concerning trust owned life insurance.
He can be reached at 617-527-9736.
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