Changing Times, Altered
Demographics, New
Assumptions -- The Shifting
Philanthropic Sands
Strategies and Tactics for Success
King McGlaughon,
Senior Vice President,
Chief Philanthropic Officer,
Wells Fargo Wealth Management
What is the Environment
Today?
•
•
•
Increased and evolving regulations, oversight, and potential liability
of officers and directors
Increasing competition for donors, other funding dollars.
Basic capitalization and fiscal challenges at the institutional level
• Diminishing endowments and reserves (-30%)
•
Stresses on federal, state and corporate funding and
grantmakers (2010 and forward)
Financial stress on individual donors
Nonprofits face increasing pressure for accountability and sound
management from
• Government
• Donors
New donor demographics
Increased use of technology, expansion of the “local community” of
nonprofits and donors
•
•
•
•
•
Adoption of UPMIFA in most states by 2009
The Dimensions of Giving in the United States
•
80 percent of US households give to charities each year.
•
•
An estimated 75% of all donors (not all donated dollars)
receive no tax benefit from their charitable gifts
As our wealth increases, the percentage of households that
contribute rises markedly
•
95% of families with a net worth in excess of $1 million
give to charitable organizations annually
•
98% of families with a net worth in excess of $5 million
give annually
2009 charitable giving
Total = $303.75 billion
($ in Billions)
Total Giving, 1969–2009
Total Giving, 1969–2009
Millionaire Households
(in Millions)
10
9.0
9
8.0
8
7.0
7
6.0
6
5.0
5
4.0
4
3.0
3
2
2.0
1
1.0
0
0.0
198919921995199820012003200420052006
Households
Percent of Total
Types of recipients of contributions, 2009
Total = $303.75 billion
Giving by type of recipient as a percentage of total giving Five-year
spans; does not include “unallocated”
Data began in 1978 for foundations and in 1987 for environment/animals and international affairs.
The number of 501(c)(3) organizations
2000–2009
Total giving by source by five-year spans in
inflation-adjusted dollars, 1970–2009
Total giving by source by five-year spans in
inflation-adjusted dollars, 1970–2009
Giving by type of recipient
Five-year spans, adjusted for inflation
Motivation for Increased Giving
The Importance of Giving for the Affluent
Income Contributed to Charity by the Affluent
$5.5 million
Amount Contributed
Percent of Income
$1.5 million
$1,000,000
$488,000
$211,000
16.5%
11.6%
3.5%
10.6%
$13,113
$10,000
80%
34.5%
$65,780
$100,000
100%
90%
57.0%
$10,000,000
70%
60%
50%
40%
30%
20%
10%
$1,000
0%
$1-5 million
$5-10 million $10-20 million $20-50 million $50-100 million $100+ million
Family Net Worth
Source: Boston College - Social Welfare Research Institute & Bankers Trust
The Importance of Giving for the Affluent
Estate Distribution to Charities by the Affluent
45%
41%
40%
35%
30%
25%
20%
15-16%
15%
10%
8-9%
5%
0%
$1-5 million
$5-20 million
Asset Level
Source: Boston College - Social Welfare Research Institute & Bankers Trust
$20+ million
Philanthropy is one of the top 4 financial issues
for UHNW investors
Tax
Minimization
91%
Asset
Management
89%
Estate Planning
Philanthropy
73%
51%
Philanthropy is one of the top 4 financial issues
for UHNW investors
Tax
Minimization
91%
Asset
Management
89%
Estate Planning
Philanthropy
73%
51%
What DOES Matter? – Net Worth
What DOES Matter? – Source of Wealth
Giving to foundations, 1969–2009
The Boom in Donor-Advised Funds
•
•
Size of Donor
Advised Fund
Market grew
more than
1300% from
1995 to 2007
Proliferation of
“commercially
sponsored” DAF
programs since
Fidelity Gift
Fund
established in
1991
Total Assets
$27.7 Billion
$24.3 Billion
$20.8 Billion
$18.8 Billion
$17.3 Billion
$14.6 Billion
$12.3 Billion
$10.2 Billion
$7.5 Billion
$2.4 Billion
Source: The Chronicle of Philanthropy
Client values that DO affect Philanthropy:
•
Philanthropic Motivation
•
Concern about effects of wealth on heirs
•
Desire to control access to wealth by succeeding
generations

Preservation of capital

Protection of assets from spouses, creditors, etc.
•
Desire to create a “legacy”
•
Sense of moral or legal obligation
Philanthropic Motivation
79%
80%
69%
63%
70%
50%
46%
60%
50%
29%
40%
11%
30%
4%
20%
2%
10%
0%
Desire to support
worthwhile causes
Meet community's
critical needs
Set example for
children
Tax benefits
Pressure from peers
What Matters? ATTITUDE
•
“Destin-ators” versus the predestined.
•
•
•
•
•
Wealth builders/creators versus wealth
preservers/conservors
Change agents
Entrepreneurs versus inheritors
The secure versus the insecure
The “controllers” versus “the controlled”
Wealth Recency
A Demographic Shift
What is the Environment
Today?
•
•
•
Increased and evolving regulations, oversight, and potential liability
of officers and directors
Increasing competition for donors, other funding dollars.
Basic capitalization and fiscal challenges at the institutional level
• Diminishing endowments and reserves (-30%)
•
Stresses on federal, state and corporate funding and
grantmakers (2010 and forward)
Financial stress on individual donors
New donor demographics
Nonprofits face increasing pressure for accountability and sound
management from
• Government
• Donors
Increased use of technology, expansion of the “local
community” of nonprofits and donors
•
•
•
•
•
Adoption of UPMIFA in most states by 2009
How do we connect with the “Younger
Donor”?
•
•
•
•
•
Communication and message strategies
Board composition
“Control and leadership” opportunities
Technology
• Invite a group of younger people to view
your technology resources – make
adjustments
• Phone versus tablet versus PC
Strategic (planned) giving opportunities
Who is the “Younger Donor”?
•
•
Traditional “Donor” was 66+, with
planning occurring in the 55-65 year old
period
“Younger Donor” is 40-55
•
•
•
•
•
Financially focused
Control oriented
Planning oriented
Expects much from charitable “partners”
Has long-range goals and aspirations
Perspective of Younger Donors
•
•
•
•
Longevity: have much longer
planning/investment horizons
Longer/multiple retirement periods: high
retirement income expectations
Inflation conscious: need to avoid
“erosion” of principal over time
Focused on growth, inheritance and
creativity
Financial Expectations of Younger Donors
•
•
•
Growth of income stream over long
investment horizon
Equal or better performance of
“philanthropic assets” relative to “financial
assets”--NEVER LESS
Frequent, accurate and informative
reporting
Strategies
“Escalating Payment” CRT
•
Donor creates 5% NICRUT at age 40
•
Initial funding with $250,000
•
Invests “aggressively” for growth



Total return on equities = 11.15% (avg. return on large
and small cap equities 1926-1997)
Yield on bond allocation = 5.88% (ML 1-10 yr. G/C Index,
held to maturity)
Yield on S&P 500 = 1.42% (as of 5/26/98)
Strategies
“Escalating Payment” Income
100,000
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
$88,922
$52,646
r
Ye 5
ar
10
Ye
ar
15
Ye
ar
20
Ye
ar
25
Ye
ar
30
Ye
ar
35
Ye
ar
40
Ye
a
Ye
a
r1
$27,896
20/80
50/50
80/20
Strategies
“Escalating Payment” Principal
7,000,000
6,000,000
$6,167,862
5,000,000
4,000,000
3,000,000
2,000,000
$1,910,057
1,000,000
0
$570,936
r1 ar5 r10 r15 r20 r25 r30 r35 r40
a
Ye
Ye Yea Yea Yea Yea Yea Yea Yea
20/80
50/50
80/20
Strategies
“Escalating Payment” CRT
•
Income stream never equals 5% payout in aggressive
growth investment strategy
•
Future income not guaranteed--only a projection
Strategies:
Term CRTs
•
Phase I: Term CRUT used to grow assets efficiently while
producing supplemental income
•
Phase II: Remainder interest used to create Foundation
used as vehicle of “second career” interests and goals
Strategies:
Closely-Held Business CRTs
•
C-Corp shares to CRT to ESOP
•
QRP (after ESOP funding) to CRT
•
CRT/Stock Redemption to “move” closely-held business to
next generation
Strategies:
Lifetime Foundations and SOs
•
Use to create income tax shelter through gifts of
appreciated assets resulting in income tax charitable
deductions with 5-year carry forward
•
Build and operate a strategic foundation
during productive years, affecting change and
creating leadership role in community
The Current Market Environment
The Current Regulatory Environment
Changes in overall federal tax regime
•2010 as year of “no transfer tax” (maybe)
•2011 as year of “reversion to ‘old transfer tax’”
(maybe) – the “stepped-up basis” conundrum
•Projected increases in Income Tax (and Capital Gains
Tax) rates
•Interest in income tax deductions will increase as
tax rates climb, especially capital gains rates
(collectibles currently at 28%)
Changes in overall “charitable giving”
infrastructure
• Gifts from IRAs and other “tax-benefitted” tools
• Supporting organization, private foundation, large
public charity, and donor-advised fund proposals
The Current Market Environment
CRTs are excellent asset management tools
•Tax free asset management zone (increases “real”
net total return on investments)
•Ability to move around in market without concern
for realization of gains in portfolio
•Creates cash flow through Income Tax Deduction,
conversion of dividends a/o interest into income
stream based on total value
•Ability to control taxability of income stream
through changes in asset allocation
•Interest will increase as tax rates climb, especially
capital gains rates (collectibles currently at 28%)
The Current Market Environment
The “Fearful Investor”
•Has become “risk averse”
•Wants to bail out into fixed income assets
•Wants economic security in erratic market
Use a CRAT to create a “fixed income
asset” from equities.
Consider a “Megannuity”
The Current Market Environment
“Not-readily Marketable”
Assets
(Generally unaffected by stock market
declines; may rise in down markets; may
experience increasing values as “safe
harbor” for uninvested assets)
The Current Market Environment
“CLTs: Leverage Market Down-Turns”
• Historically low effective rates allow
maximum planning leverage for CLTs
 Strong stocks that have lost value
 Client intends to hold
 Deflated value makes for optimal CLT
funding, all “bounce back” occurs
outside donor’s taxable estate
• Leverage the Market AND the lifetime
estate/gift tax exemptions/exclusions
Advisors and Giving
What Donors Want in Their Charitable Advisor
Planned-giving
officers
Professional
advisors
16.0%
97.9%
Skill and efficiency in working with the donor's professional
advisers or with the charity
60.3
75.2
Willingness to let the donor set the pace in the planned-giving
process
67.2
86.0
Help in deciding what type of planned gift to make
85.5
96.8
Knowledge about the advantages and disadvantages of each
type of planned gift
94.7
99.4
Sophisticated understanding of the donor's personal
motivations to give
99.2
82.2
Effectiveness in getting the charity to treat the donor as he or
she wants to be treated
69.5
11.2
Expertise in the technical details of executing the planned gift
Note: 603 donors surveyed.*
Donors in the survey had made planned gifts worth at least $75,000 and had
a net worth of $5-million or more. Source: Prince & Associates and Private Wealth Consultants