Many fundraisers don’t understand the world of big philanthropy. Why not? Because they don’t understand wealth. They don’t understand charitable instruments. So, let’s start with some basics.

Because that’s where the money is
In the U.S., the most important charitable instruments include,

  • Charitable remainder and lead trusts
  • Donor advised funds, and
  • Private family foundations.

These are “kind of a big deal.” What is the largest charity in the U.S.? It’s a donor advised fund.[1] So is the third largest. And the sixth. And the eighth, and the ninth, and the tenth.

What about charitable remainder and lead trusts? They hold over $100 billion.[2] That’s about 50 to 100 times what the American Red Cross or the American Cancer Society has.

What about private foundations? They hold about a trillion dollars.[3]

So what?
These foundations, funds, and trusts are kind of a big deal. But how does that help us raise more money?

Over the long term, raising more money means one thing: Delivering more value to donors. Understanding the attraction of these instruments can help. It reveals the psychology of giving and wealth. It also shows your charity’s real competition.

Charitable foundations, funds, and trusts attract huge donations. They provide real value to donors. They can

  1. Multiply the feeling of being generous
  2. Divide the feeling of paying a cost
  3. Allow giving and holding wealth at the same time
  4. Include instructions reflecting the donor’s identity, and
  5. Give permanence to the donor’s identity.

Let’s explore each of these ideas.

1. Multiply the feeling of being generous
A donor makes a gift to a charity. That’s one step. Simple enough. But with foundations, funds, and trusts, things aren’t so simple. That one step becomes three.

Step 1: Donor gives to a charitable fund that he controls.
Step 2: Donor manages the assets in the charitable fund.
Step 3: Donor makes transfers from the fund to a charity.5

These steps multiply the experience of generosity. The donor is generous when he gives to the fund. The government recognizes this. It awards him a deduction.

Later, the donor sends money out of the fund. The donor is generous again.[4] A charity recognizes this. It gets the money and makes an impact.

In between these two steps, the donor manages his charitable fund. This regularly reminds him (and others) of his generosity.

Suppose Bill Gates hadn’t created a private foundation decades ago. Suppose he had just written a check to charity. Would we have been consistently reminded of his philanthropy for all these years? No. Would he have been? No.

Breaking apart these steps is powerful. The one-time experience of being charitable can become a lifetime experience.

 

2. Divide the feeling of cost
At the first step, the donor gives to his charitable fund. But this cost isn’t as painful as a normal gift. The donor isn’t giving up as much. He still controls the investments. In some cases, he can even benefit from them.[5] He still controls which charities get the funds and when.

At the third step, the donor transfers from the fund to a charity. But this cost isn’t as painful as a normal gift. The donor isn’t giving up as much. The gift has already been committed to go to charity at some point. The decision affects only the timing. This transfer to charity doesn’t affect the donor’s personal finances. The donor doesn’t have to worry about being able to afford it.

3. Allow giving AND holding wealth
At the second step, the donor has already given. He has already received a tax deduction for it. He has been charitable. And yet, he still holds the wealth. The donor gives the wealth and holds the wealth at the same time.

Why is this such a big deal? Because wealthy people like to hold wealth. That’s part of the reason why they became or stayed wealthy.

Wealthy people like to hold wealth. That means they don’t spend it even during retirement. What happens among the wealthy (top 5%) after age 65? Their rate of wealth accumulation actually increases.[6] At every older age, they just keep accumulating more. This is true even up to 100 years of age.

Wealthy people like to hold wealth. That means they don’t give it away to family members during their life. They don’t do so even though it would save enormously on estate taxes.[7] Of course, if they did that, they wouldn’t be holding the wealth anymore.[8]

Only 1 out of 5 wealthy people with $50 million or more feel extremely financially secure 1 out of 10 feel somewhat insecure

Estate giving allows donors to give and hold wealth at the same time. A donor includes a charity in his estate plan. He is charitable. But he is still holding the wealth. Do wealthy donors prefer to give this way? Yes.

Those with estates under $2 million generate estate donations worth 3.5 times their annual giving. For those with estates of $2–$5 million, it’s 20 times. For those with $5–$10 million, it’s 25 times. For those with $10–$50 million, it’s 28 times. For those with $50–$100 million, it’s 50 times. For those with $100 million or more, it’s 103 times annual giving.[9] Wealthy people prefer giving that allows them to continue holding wealth.

4. Include instructions reflecting the donor’s identity
Gift instructions can be simple. Giving to a specific cause is an instruction. So is giving to a special project. What’s the most extreme version of gift instructions? Foundations, funds, and trusts. These can involve pages of detailed instructions. The instructions control the gift for decades or even generations.

These large gifts come with lots of instructions. This is no accident. Large gifts from life savings require compelling motivation. Instructions reflect the donor’s values, life story, and identity. They make the gift compelling.

This reality is not new.[10] In two studies of wills from the late 1800s,[11] charitable bequests were restricted in

  • 14% of small cash gifts
  • 58% of real estate or large cash gifts, and
  • 70% of gifts of a share of the entire estate.

It’s not just that large gifts tend to be restricted. In experiments, allowing restrictions makes donations larger.[12] The instructions make the gift compelling.

5. Give permanence to the donor’s identity
Philanthropy provides value to donors. It allows donors to accomplish things they couldn’t do alone. A donor can’t provide a college education. But through a nonprofit he can. A donor can’t advance cancer research. But through a nonprofit he can. The charity is the donor’s powerful instrument.

A charity can do something else that the donor can’t. It can live forever.

One of the central psychological challenges for humans is personal mortality. This life is temporary. We’re going to disappear. Facing this reality can be challenging.

In experiments, people respond to death reminders by pursuing “symbolic immortality.”[13] This is the idea that some part of one’s identity – one’s values, story, name, family, or community – will live on.

The ultimate charitable instrument for symbolic immortality is the private foundation. It’s often named for and managed by the donor and the donor’s family. It’s legally bound to advance the donor’s values. And it lives forever. The donor’s name lives on. The donor’s values live on. The donor’s story lives on.

Research on charitable permanence
When mortality is relevant, permanence becomes powerful. For estates over $5 million, 78% of charitable bequest dollars go to private family foundations.[14] Just 35 of the wealthiest and oldest schools get over a quarter of all estate gifts to education.[15] Permanence is powerful in estate giving.

In one experiment, mortality reminders increased current donations.[16] But this worked only when the charity was described as, “Creating lasting improvements that would benefit people in the future.”

If instead, the charity was described as, “Meeting the immediate needs of people,” the results reversed. Now, mortality reminders caused donations to fall.

In another experiment, permanence worked for memorial gifts. Adding a goal of making a scholarship fund permanent worked. It dramatically increased the likelihood for additional gifts in memory of a loved one.[17]

As people age, mortality becomes more present. So too does the desire for lasting impact.[18] Major gifts often occur at older ages. They often come from life savings. Permanence is important for these gifts. Large gifts tend to go to large charities that hold large endowments.[19] These charities offer more permanence.

Legal theory recognizes this power of permanence. One law professor writes, “Laws enforce perpetual funds for charity because to do otherwise would discourage gifts.” [20]

The law doesn’t allow perpetual funds because they’re the best use of charitable dollars. It allows them because permanence attracts the donations in the first place.

Do you want to?
Big donations come from providing donors with big value. Foundations, funds, and trusts do that. But so can charities. Charities can if they decide they want to. This isn’t a trivial decision. In fact, it’s rare.

In the view of many charity managers, delivering value to donors is crazy talk. They may think, “That’s not how it’s supposed to work. The donor’s job is to deliver value to the charity. The charity’s job is just to be its wonderful self. If the charity keeps doing its work, the donors are supposed to keep giving. This other stuff just makes it harder to use the donor’s cash.”

This view is common. But it doesn’t work for fundraising. It doesn’t work because philanthropy is not fixed. Delivering value to the donor creates philanthropy.

It also doesn’t work because donors are free to choose. If we don’t beat the competition, we won’t get the money. For massive donations, the competition isn’t the charity across town. It’s foundations, funds, and trusts.

Yes, we can!
Charities can provide value to donors. They can compete with foundations, funds, and trusts. How? Let’s look at some examples:

  • Charities can allow permanent endowments that follow the donor’s instructions forever.
    • If the charity is new or unstable it can borrow permanence. It can have an established community foundation hold the funds.
  • Charities can emphasize estate giving.
    • This allows donors to give and hold wealth at the same time.
    • Once the final destination of the funds is set, current giving changes only the timing. No surprise then that donors increase annual giving by over 75% after adding charity to an estate plan.[21]
  • Charities can give more influence over endowments during life.
    • One community foundation allowed scholarship donors to serve on the committee that selects recipients.[22] The result? It’s now the state’s largest scholarship program.[23]
  • Charities can promote instruments that combine gifts to the charity[24] with continued control of the wealth. This includes,
    • Charitable remainder trusts
    • Charitable lead trusts, and
    • Retained life estates.
  • Charities can encourage instructions with large gifts.
    • Instructions increase the value of the gift experience. They also lead to discussions about bigger (or more permanent) impact from bigger gifts.
    • Want to increase a planned estate gift (or learn of its size)? Ask, “Have you ever thought about how you would like your gift to be used?” Give examples of gift amounts and their impact.
  • Charities can get creative with blended gifts.
    • If the donor doesn’t have the cash for a permanent endowment, offer a virtual endowment. The donor gifts annually for the payout plus some principal. An estate gift guarantees any remaining principal.
    • Discount any “unsold” naming opportunities by counting multi-year pledges, estate gifts, or irrevocable trusts.[25]

Conclusion
These are just a few examples of how charities can provide value to donors. The best solution for each charity or donor will vary. But the key is understanding one idea. Big gifts come from delivering big value to donors.

Many charities never get big gifts because they aren’t trying. They aren’t trying to deliver big value to donors.

Charities can compete with foundations, funds, and trusts. They can deliver big value to donors. They can transform the donor’s experience. And that will transform the charity’s fundraising.

Footnotes
[1] Philanthropy New Digest. (2017, November 2). Fidelity Charitable tops list of largest charities in 2016. https://philanthropynewsdigest.org/news/fidelity-charitable-tops-list-of-largest-charities-in-2016

[2] Unfortunately, the data for these instruments is nearly a decade behind. Rosenmerkel, L. S. (2013, August). Split-interest trusts, filing year 2012. https://www.irs.gov/pub/irs-soi/14eowinbulsplitinterest12.pdf

[3] $889,375,778,000 in 2016, so potentially more than a trillion at present. Internal Revenue Service. (2019, November). Domestic private foundations study. Table 3. Domestic private foundations: income statements and balance sheets, by size of fair market value of total assets, tax year 2016. Statistics of Income Division. https://www.irs.gov/pub/irs-soi/16pf03ta.xls

[4] For laboratory experiments showing this effect see, Andreoni, J. & Serra-Garcia, M. (2019, December). Time-inconsistent charitable giving. NBER Working Paper No. 22824, https://www.nber.org/papers/w22824

[5] With a charitable remainder trust the donor gets a share back as annual payments. With a unitrust version as investments increase, the donor’s payments do too. A private foundation can use funds to hire insiders including family members to perform reasonable and necessary professional services.

[6] Kopczuk, W. (2007). Bequest and tax planning: Evidence from estate tax returns. The Quarterly Journal of Economics, 122(4), 1801-1854. Figure I.

[7] Kopczuk, W., & Slemrod, J. (2003): Tax consequences on wealth accumulation and transfers of the rich. In A.H. Munnell & A. Sundén (Eds.), Death and dollars: The role of gifts and bequests in America (pp. 213-249). Brookings Institution Press

[8] In actual practice when wealthy people do give substantial wealth to family members during life, they tend to give it in a way that does not relinquish control. For example, they may gift limited partnership interests that transfer ownership, but retain the general partnership interests that actually control the entity’s operations. They give the wealth, but they don’t give up control of the wealth.

[9] Steuerle, C. E., Bourne, J., Ovalle, J., Raub, B., Newcomb, J., & Steele, E. (2018). Patterns of giving by the wealthy. Urban Institute. Table 4. https://www.urban.org/sites/default/files/publication/99018/patterns_of_giving_by_the_wealthy_2.pdf

[10] James, R. N., III. (2020). American charitable bequest transfers across the centuries: Empirical findings and implications for policy and practice. Estate Planning & Community Property Law Journal, 12, 235-285.

[11] See James, R. N., III. (2020) analysis of data from Britt, S. H. (1937). The significance of the last will and testament. The Journal of Social Psychology, 8(3), 347-353 and Knaplund, K. S. (2015). Becoming charitable: Predicting and encouraging charitable bequests in wills. University of Pittsburgh Law Review, 77, 1-50.

[12] Helms, S. E., Scott, B. L., & Thornton, J. P. (2012). Choosing to give more: Experimental evidence on restricted gifts and charitable behaviour. Applied Economics Letters, 19(8), 745-748; Helms, S., Scott, B., & Thornton, J. (2013). New experimental evidence on charitable gift restrictions and donor behaviour. Applied Economics Letters, 20(17), 1521-1526; Li, S. X., Eckel, C. C., Grossman, P. J., & Larson, T. (2013). Who’s in charge? Donor targeting enhances voluntary giving to government. Available at SSRN: https://ssrn.com/abstract=2293407

[13] Pyszczynski, T., Greenberg, J., & Solomon, S. (1999). A dual process model of defense against conscious and unconscious death-related thoughts: An extension of terror management theory. Psychological Review, 106, 835-845.

[14] Raub, B. G. & Newcomb, J. (2011, Summer). Federal estate tax returns filed for 2007 decedents. Statistics of Income Bulletin, 31, 182-213. p. 191. https://www.irs.gov/pub/irs-soi/11essumbulestatereturns.pdf [perma.cc/2FJZ-LV46].

[15] Fleischer, M. P. (2007). Charitable contributions in an ideal estate tax. Tax Law Review, 60, 263-321. p. 303.

[16] Wade-Benzoni, K. A., Tost, L. P., Hernandez, M., & Larrick, R. P. (2012). It’s only a matter of time: Death, legacies, and intergenerational decisions. Psychological Science, 23(7), 704-709.

[17] James, R. N., III. (2019). Encouraging repeated memorial donations to a scholarship fund: An experimental test of permanence goals and anniversary acknowledgements. Philanthropy & Education, 2(2), 1-28.

[18] In particular, as adults age, they are more likely to respond to mortality salience with an increased interest in generativity (emphasizing one’s lasting impact) (Maxfield, et al., 2014), and it becomes increasingly important that the ending phase of one’s life story “ties together the beginning and middle to affirm unity, purpose and direction in life over time” (McAdams, 1996, p. 309).

Maxfield, M., Greenberg, J., Pyszczynski, T., Weise, D. R., Kosloff, S., Soenke, M., Abeyta, A. A., Blatter, J. (2014). Increases in generative concern among older adults following reminders of mortality. International Journal of Aging and Human Development, 79(1), 1-21.

McAdams, D. P. (1996). Personality, modernity, and the storied self: A contemporary framework for studying persons. Psychological Inquiry, 7, 295-321.

[19] Over two-thirds of all donations over $1 million go to universities that hold large endowments or foundations that are large endowments. See, e.g., Coutts and Co. (2015). Coutts million pound donors report, http://philanthropy.coutts.com/en/reports/2015/united-states/findings.html and http://philanthropy.coutts.com/en/reports/2015/united-kingdom/findings.html

In 2019, nine of the ten largest charitable gifts went to such groups. Yakowicz, W. (2019, December 29). The biggest philanthropic gifts of 2019. Forbes. https://www.forbes.com/sites/willyakowicz/2020/12/29/the-top-10-philanthropic-gifts-of-2019

[20] Brody, E. (1997). Charitable endowments and the democratization of dynasty. Arizona Law Review, 39, 873-948. p. 942-43.

[21] “Thus, using these 8,891 “before and after” observations from 1993-2016, inflation-adjusted giving was, on average, about 77% greater after the charitable estate planning component was added than it was before ($7,699 versus $4,355).” James, R. N., III. (2020). The emerging potential of longitudinal empirical research in estate planning: Examples from charitable bequests. UC Davis Law Review, 53, 2397-2431. p. 2422.

[22] Oklahoma City Community Foundation. (2007, April 6). Oklahoma City Community Foundation scholarship fund policy. https://www.occf.org/documents/ScholarshipPolicy.pdf

[23] https://www.occf.org/fundoptions/

[24] Making the instrument restricted to the specific charity is the key goal here. Donor recognition, benefit, control, and value should be triggered when the instrument irrevocably names the charity. Otherwise, this would be treated like any other revocable estate gift.

[25] Such as charitable remainder trusts, charitable lead trusts, or retained life estate deeds. This “discounting” idea comes from Lani Starkey at Fifty Rock Consulting. Starkey, L. (2020, March 12). The five types of blended gifts: The what, when, and why of closing blended gifts [presentation]. Hawaii Gift Planning Council Annual Conference on Gift Planning, Honolulu, HI.

 

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