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Friday October 18, 2019

Article of the Month

New Decade Nonprofit Trends


Author: A. Charles Schultz, JD, AEP®

"It is tough to make predictions, especially about the future."
       Yogi Berra, Baseball Coach and Philosopher

As we approach the new decade, what trends will emerge for successful nonprofits?

There are several reasons to be optimistic about giving in the new decade. The economy is strong and there is high employment. Public and private stock, homes and commercial real estate values are all solid. A strong economy, high employment and solid asset values generally lead to increased giving.

However, there also will be challenges. With the passage of the Tax Cuts and Jobs Act in 2017, the number of itemizers declined from around 30% in 2017 to about 10% by 2019. Because some donors are no longer itemizing, they may be less likely to make charitable gifts. Even though many loyal donors will continue to give, there is expected to be a fairly flat growth trend for the traditional annual fund.

In addition, many nonprofits are having difficulty replacing senior donors who pass away with new younger donors. While the number of nonprofits has been increasing, total donor numbers have remained generally flat over the past few years. Competition for annual fund donors will continue to increase, especially for midsized nonprofits. All nonprofits will need to expand their tents by increasing the number of new, younger donors.

Based on these giving positives and challenges, there are four major trends that will be evident during the new decade. These are growth in annual funds through IRA rollover gifts, greater fundraising success for charities that are marketing gifts of stock and land gifts, continued significant growth for donor advised fund (DAF) gifts and a blossoming of boomer generation bequests.

"New Annual Fund" with IRA Rollover Gifts


Annual fund giving is the lifeblood of all nonprofits and is essential in funding charitable programs. Loyal donors faithfully support each organization through annual fund gifts. Nonprofits should steadily build annual fund giving — both for current support and because loyal donors are candidates for future major, blended and planned gifts.

The next decade presents two big challenges and one golden opportunity for annual funds. The challenges for annual funds include the reduced number of itemizers (from about 30% in 2017 to 10% today) and the limited number of new younger donors who are replacing the seniors who pass away. The golden opportunity is to grow a "New Annual Fund" through IRA rollover gifts.

Many organizations have been building their annual funds for decades. In the early years of an annual fund, there is often modest growth between years one and three, greater growth from years three to five and increased momentum and growth from years five to 10.

It is quite probable that the pattern for a New Annual Fund from IRA rollovers will be quite similar. When individuals who are over age 70½ start making qualified charitable distributions (QCDs) from their IRAs, they are likely to continue those gifts each year. Because QCDs may fulfill their required minimum distributions (RMDs), many QCD donors increase their traditional annual fund gifts by 15% to 25%. Under federal tax rules, the RMD increases each year, thus there is an incentive for individuals to make larger IRA rollover gifts each year.

Both the traditional annual fund and the New Annual Fund must have multichannel marketing programs. A consistent marketing program will encourage senior donors to increase giving. In the book Good to Great, author James Collins emphasizes the importance of "pushing the flywheel." With consistent small pushes, the flywheel moves faster and faster until there is "almost unstoppable momentum." Success for nonprofit organizations comes from a steady growth in a favorable program. By continuing to market the "New Annual Fund," charities are continually pushing the flywheel.

This marketing will produce many IRA rollover gifts and substantial New Annual Fund revenue. How much revenue may be expected from the New Annual Fund? To some extent, it depends on the number of loyal donors who are over age 70½. Based upon surveys of Crescendo seminar classes, many nonprofits report 40% to 65% of their loyal donors are over age 70½. Because these organizations find that a significant percentage of their loyal donor base is in this category, there are likely to be many individuals who could and will make large IRA gifts.

The Investment Company Institute reported IRA balances were over $9 trillion in October 2018. With an estimated $3 trillion to $5 trillion in the loyal donor IRA pool, there should be sustained growth in your New Annual Fund revenue. While the time it takes for a marketing program to mature is often between three and 10 years for most organizations, the cumulative effect could be significant. The New Annual Fund may equal 20% to 40% of the existing annual fund.

Assume that a large university has an annual fund that is producing $2 million. This success has been built up over the past eight decades and represents a significant commitment of both staff and financial resources. The potential result for a consistent IRA gift marketing program is to generate a New Annual Fund that may produce an additional 20% to 30% of the existing fund. If the higher percentage could be reached with a New Annual Fund marketing program, the university may add $500,000 and raise $2.5 million per year. Several universities have passed the $500,000 IRA rollover level after three years of consistent marketing.

A 20% to 30% increase in annual fund amounts is possible with an effective IRA rollover marketing campaign for three to five years. Research with CPAs indicates that 70% to 85% of donors with large IRAs take a single RMD in October or November. Therefore, the majority of IRA rollover gifts are made during the fourth quarter of the year.

A persuasive IRA rollover campaign includes a multichannel marketing effort each September, with an extended postcard, eNewsletter headers, eBlasts and social media posts. These multiple contacts are designed to encourage loyal donors to make an IRA rollover gift.

Gifts of Land and Stock


Dr. Russell James is a leading researcher of philanthropy in America. In his 2018 article, "Cash is Not King for Fundraising: Gifts of Noncash Assets Predict Contributions Growth," James analyzed gifts of cash and appreciated property.

He compared the success of charities that marketed cash-only gifts in 2010 and 2015 with those who marketed gifts of cash, stock and land during both years. James discovered that the charities marketing gifts of appreciated property had greater success in raising both cash and noncash gifts.

Midsized charities are nonprofits with $3 million to $10 million in annual gift revenue. The midsized charities that were raising cash-only gifts in 2010 had essentially no growth in giving between 2010 and 2015. Midsized charities that were promoting gifts of cash, land and stock enjoyed giving growth of 7.3% per year over those five years.

There was also a clear benefit for large organizations with over $10 million in annual gift revenue. If large organizations promoted cash-only gifts, they experienced 4.8% growth per year. They grew from a median gift of $27 million in 2010 to $34 million in 2015. However, the large organizations that promoted gifts of cash, land and stock enjoyed 6.2% growth per year. Giving to these organizations increased from $51 million in 2010 to $68 million in 2015.

The more powerful statistic is that this increased growth of 2.4% (6.2% versus 4.8%) when compounded over multiple years results in much larger total giving. The median 2015 gift amount for nonprofits that promoted cash, land and stock donations was $68 million. This was double the median gift amount of $34 million for those large charities that marketed cash only gifts. Doubling the total gifts over time by marketing both cash and noncash gifts is a stunning statistic! The "cash only" nonprofits lost 50% of their potential gifts by not marketing gifts of stock or land.

During the next decade, there is likely to be limited growth in the total number of donors. As a result, there will be substantial competition for donor dollars. Thousands of midsized and large charities will discover that they must market stock and land gifts or their cash giving will stagnate at the current level. When these nonprofits become proactive in their marketing, there will be a significant growth in stock and land gifts during the new decade.

Donor Advised Funds


A donor advised fund (DAF) involves a gift of cash, stock or land to a public charity, with the donor and family members designated as grant advisors. The charity manages and invests the fund and makes distributions for charitable purposes. DAFs are frequently sponsored by community foundations, religious foundations and other nonprofits.

The DAF donor generally receives a full fair market value deduction for cash or appreciated property gifts. The donor or designated family members may advise the charity to make DAF grants. While the parent charity owns the fund assets, most charities that administer DAFs will attempt to follow the DAF advisors' recommendations. Nearly all DAF grants are made to qualified Sec. 501(c)(3) organizations.

During the next decade, DAFs will continue to experience explosive growth. In 2017, the National Philanthropic Trust reported the existence of 285,000 DAFs. Donors gave $23 billion to DAFs and made $16 billion in grants in 2017. The net increase of DAF principal was $7 billion plus investment growth.

The largest DAF nonprofit is affiliated with Fidelity. In 2018, Fidelity Charitable had 123,114 giving accounts. Grant values from Fidelity DAFs have steadily increased to $5.2 billion in 2018. Vanguard, Schwab, Morgan Stanley and many other financial institutions have similar charitable affiliates with DAFs.

Community and religious foundations also have seen dramatic growth of DAFs. Many donors appreciate the convenience of funding a DAF with cash or an appreciated property gift and then making grants at a later time. The DAF also has a very attractive benefit — children, nephews, nieces and other family members may be included as advisors. Donors view this family member involvement as beneficial for teaching good values to heirs.

A DAF is simple to create and much less expensive than a private foundation. DAFs may be funded with $10,000 or more, depending upon the minimum requirement of the DAF organization.

Nearly all DAF grants are made to public charities. Most community and religious foundations report that they make annual distributions of 10% to 14% of DAF fund balances. While critics have expressed concern that some DAFs are essentially parking charitable funds without making adequate distributions, the giving data shows that DAFs are generally making larger distributions than private foundations.

DAFs are available through charitable organizations affiliated with large financial service companies (Fidelity, Vanguard, Schwab and others), community foundations, religious foundations and other nonprofits.

During the next decade the "DAF Other Nonprofit" category is likely to grow significantly. Many larger nonprofits have been creating DAFs because their major donors request them. In order to avoid sending their major donors to the nearest community foundation, religious organization or financial services company fund, nonprofits of all sizes will consider DAFs in the future.

The Chronicle of Philanthropy surveys gifts to the Philanthropy 400 nonprofits each year. In 2018, approximately 24% of the total gifts to the Philanthropy 400 were to DAFs. The percentage of DAF gifts to mega-charities will continue to grow.

Boomer Bequests


Wealth in America grew significantly in the early years of this century. In 2007, the U.S. Federal Reserve reported net household wealth to be approximately $65 trillion. While net worth declined in the 2008 downturn, over the next decade there was a significant economic recovery and unemployment moved below 4%.

As a result, the stock markets recovered and the Standard and Poor's 500 Index reached an all-time high. In addition, housing recovered and the home equity of Americans rebounded. The Federal Reserve reported that net household wealth in America had grown to over $100 trillion by 2018.

In a 2016 article on "The Future of Wealth in the United States," the Deloitte accounting firm projected the future net household worth of the Boomer generation. By 2028, the Deloitte projection shows the Boomer generation with a net household worth of $52 trillion. Boomers will be the wealthiest generation in history. The Boomer generation inherited wealth from the Silent generation (born 1930 to 1945) and had the advantage of their prime working years occurring during the time when America was the clear dominant economic power in the world.

Because the Silent generation started to turn 65 in 1995, the approximately 20 million surviving members of that generation passed age 65 between 1995 and 2010. Approximately 2,800 individuals turned age 65 every calendar day. Between 2020 and 2030, about 2600 members of the Silent generation will pass away each calendar day.

The much larger generation of Baby Boomers started to turn 65 in 2010. With larger families and an increased number of children, there were substantially more Boomers born each year between 1946 and 1964 than for the Silent generation during 1930 to 1945. Between 2010 and 2030, approximately 10,000 Boomers will turn age 65 each day. The 78 million Boomers are expected to have 8,500 "Graduation Days" each day from 2030 to 2054 (most Boomers will pass away in their mid to late 80's).

In their 2009 article "A Golden Age of Philanthropy," Dr. Paul Schervish and Jason Havens provided detailed projections for the probable transfer of Boomer wealth. Their projections cover the time period from 2007 through 2061. In 2014 dollars, with 1% growth of typical estates from 2027 to 2061, they project $2.31 trillion in charitable bequests. For the prime Boomer distribution period from 2028 to 2054, a linear extrapolation produces a Boomer bequest estimate of $1.76 trillion. A reasonable estimate for Boomer bequests during that time period is a minimum of $1.5 trillion.

Commentators have noted that 2018 bequest maturities did not reach the projected Schervish numbers. When Dr. Schervish spoke at the 2017 Practical Planned Giving Conference, your author stated, "Paul, your numbers are correct. Based upon my three decades of experience, the donor potential is real, but the nonprofit bequest marketing programs were not sufficient. If 2,000 large and midsized nonprofits create solid multichannel marketing programs, we will surpass your bequest numbers!"

New Decade Predictions


Prediction I: Annual Funds — 90% of the new decade growth in annual fund gifts will come from IRA charitable rollovers.

Prediction II: Gifts of Stock and Land — Nonprofits that market cash, land and stock gifts will grow their gift revenue at an annual rate that is 3% higher per year than those marketing cash-only gifts. The increase in gifts by 2030 with 3% greater giving growth is 34%!

Prediction III: Donor Advised Funds — DAFs will grow substantially because many nonprofits will join financial, community and religious foundations in offering donor advised funds. New decade DAF gifts will comprise 30% of total gifts to the Philanthropy 400.

Prediction IV: Boomer Bequests — Nonprofits who build a large "Boomer Bequest" pipeline during the new decade will receive 25% to 35% of their 2030-2040 budgets from bequest maturities.

Author's Note: This is the third decade your author has made predictions. In 1999 he predicted "Seven Golden Years of Planned Giving From 2000-2007." He predicted that a majority of seniors would be internet users by 2010. At the NCPP Conference in 2009, he predicted that marketing to seniors would move from 90% print and 10% electronic in 2010 to 90% electronic and 10% print by 2020. Readers are welcome to comment on any predictions in this article and may send a note to the editor.

Published October 1, 2019
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