PARTNERS ADVISORY SERIES
June 2002

What Your Donors Are Reading About Donor-Advised Funds, Gift Annuities and Special Events

Most of us don’t have time to thumb through more than a few publications at work or home. Yet, it behooves us to be aware of what our donors are reading in the press. We need to be aware of concerns or questions that may be raised in their minds, so that we can be proactive in our communications with them.

Donor-Advised Funds
The May issue of Inc magazine reports that even people of moderate means are considering various means of giving to charity including donor-advised funds and private foundations. In recent years there has been explosive growth in such funds at community foundations with a growing number of commercial providers jumping into the arena. According to a survey by the Chronicle of Philanthropy, over 53,000 donor-advised funds were established with the nation’s largest nonprofit and for-profit organizations.

Fidelity Investments Charitable Gift Fund now holds over $2.6 billion in more than 27,000 accounts. It distributed a little less than 28% of its investors’ funds in 2001. By contrast one of the largest community foundations, the New York Community Trust, has assets of $648 million and distributed a little more than 13% of funds in donor accounts.

Some nonprofit organizations like Boston University are beginning to compete more aggressively for their constituents’ contributions by offering private-label gift funds. It eases the administrative burdens, but comes at a cost. Merrill Lynch has struck up agreements with 170 community foundations to steer clients to them in exchange for continuing to manage the assets – for a fee, of course.

What’s going on here? And what should you do about it?

Over the years I have heard countless large donors, people of considerable means, express the conviction that they can manage the investment of their funds better than charitable organizations. This is usually in relation to requests for gifts to endowment. As they consider such requests and begin to learn more about how the organization manages its funds, they are startled to find that many still keep the bulk of their assets in certificates of deposit – the equivalent of putting money under the mattress. Even if invested in the market, the approach is often too conservative for donors who have been very successful investors over the years. Do you have your financial house in order? Have you earned returns that can stand up to scrutiny? Boards of directors should consider using professional money managers with the aim of beating the market’s benchmarks. That information should be shared regularly with donors.

I believe a larger problem exists with donors who choose to place their funds with a financial house. We all know that most large gifts are the results of the relationships that are built over time. What does it say about out relationships with our constituents if they choose an investment company over us? It may mean that they know and trust the folks at Fidelity more deeply than us. We have to work at involving these people in our organizations. They must get to know our CEOs and our board members as well as the development staff. Staff and volunteers come and go, so it is important to be sure these relationships are multifaceted.

Lastly, there is the issue of control. Large donors like to exercise control over the way their gifts are invested and used. Are we willing to give them some control? Are we willing to let them become more substantively involved in how we run our organizations? It doesn’t mean that we let them make decisions that are properly ours, but it does mean involving them as genuine partners in our work. That’s also the way to develop enduring relationships.

Gift Annuities
The May issue of the AARP Bulletin is bullish on high rates of returns for charitable gift annuities. The article thoroughly describes the tax and income advantages with the proper caution that such gifts are irrevocable and pay a smaller return than commercial annuities. It reports that most charities have a $5,000 or $10,000 minimum.

Now would be a good time in your communications to quote from the article to reinforce the attractive features of gift annuities that you offer your constituents. AARP members were directed to the American Council on Gift Annuities website – www.acga-web.org – and alerted that the Philanthropy Protection Act requires charities to provide potential donors a detailed disclosure statement.

Special Events
The New York Times on the front page of the Style section on May 19 reported that "the costs of wining and dining patrons…is significantly higher than reported to patrons, according to various institutions’ tax filings." One charity stated in an invitation to its annual ball that all but $150 of each $1,000 ticket was tax-deductible. The Times found that the actual cost of the ball was $461.50 per person.

Nonprofit executives who were interviewed believed that donors understood not all of their tax-deductible contribution was actually supporting the charity. However, the Times reported that "few gala guests seem aware that many parties cost more, sometimes much more, than the declared retail value of their tickets. In effect, charities are giving donors a bigger tax deduction than they are entitled to, and creating the impression that the expense of their entertainment is minimal."

The Internal Revenue Service requires donors to pay the full market value for entertainment, which is not deductible. Event organizers countered that corporate sponsors helped keep costs lower. However, those corporations are already taking a deduction for those gifts.

The burden to establish the fair market value of events is on charities. Though the IRS is too understaffed to investigate many charities, do you really want to take a chance at being the subject of a front-page article on charitable fraud and abuse?

Michael R. Maude, ACFRE, FAHP
President
Partners In Philanthropy

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