ELITE ADVISOR BEST PRACTICES
The Power of Spending Rate to Transform Philanthropy - Part Five
What advisors need to know about personalized philanthropy
By Steven Meyers
- There are many personalized gift designs that can be tailored to your clients’ life stages, needs and goals.
- When it comes to philanthropy, many clients will “put a toe in the water” by choosing early and simple gifts and then become curious about how they can do more.
- Umbrella gifts can serve a donor’s multiple interests in a single nonprofit by using the three “killer apps” of personalized philanthropy—virtual endowment, philanthropic equity mortgage and step-up.
In Part Four of this article series, we looked at the Grail of Fundraising from the perspective of the “wise” and the “wicked” donor types. Here we’ll explore the power of spending rate to transform your clients’ philanthropic objectives.
Give the Spending Rate, Give the Endowment or Give Both. Then Repeat. The Simple Truth. (Virtual Endowment)
Simple—Straightforward, uncomplicated, sincere, trusting, direct Uncomplicated, yes; simple, never! A donor named Sylvia built her classic virtual endowment on the certain knowledge that she was going to make a significant bequest through her estate. I suspect she always knew this was her intention, yet she was anything but a simple donor—she always was curious.
Many donors will “put a toe in the water” by choosing early and simple gifts but then become curious about how to do more. Sylvia initially was providing the “maintenance” spending rate, an annual gift that provided scholarship support for a single student. In her will, she had made a commitment for the minimum amount that would ultimately be needed to endow that scholarship upon her demise.
Sylvia was so satisfied with this approach and pattern of giving over the years that she duplicated it several times. As a result, her annual gifts have been covering the maintenance of several students. She also added and increased her bequest to create full endowments for each of “her students.” In effect, she has created a “scholars” program of her own by combining both her lifetime gifts and estate gifts; thus, a seemingly “simple” bequest combined with a pattern of modest annual gifts was able to establish a gift of great moment and impact.
What was the arrangement that enabled this program to come about initially and to be scaled up so significantly? It was the classic personalized gift arrangement called the virtual endowment.
You’ll recall that the virtual endowment combines two elements: an annual expendable amount and a legacy or endowment amount. The annual element is expendable, which provides the operating and maintenance costs of your client’s philanthropic program on a yearly basis. This is the amount equivalent to the “spend” of an endowment, if it is already in place. The second element is the corpus of the legacy gift or endowment, often provided by a bequest or by another charitable vehicle managed by an advisor during the client’s lifetime. That legacy will then serve as the corpus of an endowment, which will then provide the annual spend through its investment program; thus, the impact of the donor’s program begins immediately.
The Importance of “Umbrella” Gifts—You can see from the examples that each of the three “killer apps” of personalized philanthropy is an umbrella gift agreement. Each is composed of separate gift commitments, where the elements have a separate function but all serve a common purpose. For illustration here, the common purpose is to establish a scholarship with an impact that is recognized and begins immediately. The aim is for impact and recognition to begin now and grow over time. Below is a useful chart to summarize the elements and how they may be used flexibly and creatively to achieve the goal.
Variations on a Theme. There are many variations on the theme of creating multiple scholarships. A donor named Robert took a similar approach to creating a program with multiple scholars through his foundation. Rather than matching a bequest to each annual scholarship as Sylvia did, Robert decided to create fully funded scholarships with each gift in order to create a much larger “scholars” program. How did this come about? Robert’s uncle had funded a single scholarship in memory of Robert’s father many years earlier, and over the years some very impressive students had come through their program and had become professors in their own right. Robert ultimately decided to make a long-term commitment from his foundation so that each year’s pledge payment would establish its own fully funded new scholarship in the name of Robert’s family.
Savvy advisors know that there is no one-size-fits-all solution to their clients’ charitable intentions. Seeking a specialist in philanthropic giving can significantly increase your odds of developing meaningful programs that match your clients’ life stage, needs and goals. Further, while advisors might not regard expending client funds for philanthropy as entirely good news, virtual endowments that are managed by advisors definitely are [good news]. Next we’ll look at the cross-fertilization of finance and philanthropy.