Going for the Gold

You Can’t Afford Not to Pursue Planned Gifts

Are you pursuing planned gifts? You should be. Research suggests that the average planned gift in the United States falls between $35,000 and $70,000 — and with the baby boomer generation moving into their retirement years, that number may grow. Yet many nonprofits, especially small and medium-size organizations, lack formal planned giving programs.

Benefits of Planned Giving

According to Blackbaud, a software and service provider for nonprofits, planned gifts to charitable organizations over the past 40 years or so have grown 4.5% to 5.0% annually on average, even in years of economic downturn. These gifts can play a critical role in sustaining nonprofits by helping to diversify revenue sources.

Moreover, Blackbaud reports, once a planned giving program is established, it typically will boast an enviable cost-to-donation ratio, in the range of 3 to 15 cents of cost per $1 raised. And think about it: If the average planned gift is, say, $50,000, you could secure $1 million simply by landing 20 planned gifts — funds that you could use for new or existing programs or facilities or to establish endowments.

A planned giving program also can serve as a useful tool for building donor loyalty. Individuals who make planned gifts usually want to be involved in the organization over the long term and often will make more donations along the way.

Common Gifts

Donors can use a variety of vehicles to make planned gifts, but the following are some of the most common:

Bequests. The majority of planned gifts are made as bequests in a will. A will might leave a charity a flat dollar amount, a percentage of the estate or the remainder of the estate after other bequests. All of these can provide donors substantial estate tax savings.

Blackbaud research indicates that loyalty is the hallmark of those who make bequests, translating to consistent giving over the years as well as other forms of involvement. Nonprofits should consider targeting loyal donors in their mid-40s and older, who are most likely to be engaged in the estate planning process.

Don’t dismiss loyal donors who’ve made only smaller donations. You never know how large their estates could turn out to be. They might own a closely held business or valuable real estate.

Charitable Gift Annuities (CGAs). Donors can use CGAs to contribute assets, usually cash or securities, now, while still enjoying some current financial benefits from the assets. How? The donor receives a guaranteed income stream for life, paid by the nonprofit. He or she also will enjoy a charitable income tax deduction.

CGAs are appealing to donors in slow economic times. They provide some assurance to those who worry about outliving their resources, along with potentially a higher after-tax rate of return than might be achieved from other investments.

Loyal, retired donors in their late 60s and older make good prospects for CGAs. Blackbaud again warns against putting too much weight on the size of previous donations, finding that annual gifts of these donors are generally under $100.

Charitable Remainder Trusts (CRTs). CRTs are irrevocable trusts that pay a specific amount or percentage to one or more “income beneficiaries” — often the donor and his or her spouse — for a fixed term or their lifetimes, similar to a CGA. When that period expires, the remaining property in the trust goes to a specific charity or charities. CRTs are popular with the wealthy and often result in large gifts.

CRTs may be particularly attractive to donors holding low-yielding but highly appreciated assets like real estate or stock. By using a CRT, a donor can transfer the asset, avoiding capital gains when the trust sells the asset while simultaneously obtaining an income stream (some of which may be taxable).

The donor gets a charitable income tax deduction at the time of the original gift, and the remaining property that will be transferred to the charity is removed from the taxable estate. (If the donor names someone else as income beneficiary, gift tax liability may be incurred when the CRT is funded.)

Look Before You Leap

While planned giving holds tremendous promise for nonprofits, it’s important to recognize that some of the vehicles require significant hands-on involvement from an organization. Your financial advisor can help you determine the best approach for your program.

For-Profit Subsidiaries; Create Your Own Funding Source

For-Profit Subsidiaries: Create Your Own Funding Source

Imagine this — and, unfortunately, it may be easy: Your largest private donor, a foundation, has whittled down its funding amounts to reach more organizations. And since the onset of the recession, individual donations to your nonprofit have dropped by 45%. Meanwhile, your not-for-profit’s expenses, and ambitions, continue to climb.

Don’t throw up your hands in despair yet. To be less dependent on others for your survival, you could consider forming your own for-profit subsidiary.

Avoid UBI

What should a nonprofit consider before taking on the cost and responsibility of establishing a for-profit company? You’ll need, of course, to weigh the pros and cons.

Avoiding unrelated business income (UBI) is the top reason why not-for-profits create a for-profit enterprise. A nonprofit can conduct a certain amount of revenue-producing activities unrelated to its mission, but it will pay tax on unrelated profits.

And if the IRS determines that the organization is pulling in too much gross revenue or net income, or the staff is spending too much time on UBI activities, it could revoke the nonprofit’s coveted tax-exempt status. To avoid such scenarios, the nonprofit can usually transfer its UBI activities to a for-profit subsidiary.

The subsidiary needs to be separate in structure and governance and must not be an agent or integral part of the parent nonprofit. The subsidiary can make payments to the nonprofit parent that generally aren’t considered UBI. As long as the two organizations maintain separate identities, these payments can fund activities that fulfill the nonprofit’s mission.

Let’s say the fictitious Food Cupboard of America (FCA) has a highly profitable commercial bakery and draws a significant portion of its revenue from the enterprise. FCA can create a for-profit subsidiary to handle its baking activities to avoid endangering its tax-exempt status.

Gain Flexibility and Lower Risks

Other reasons exist for launching a for-profit. First, the new entity will likely have more latitude in determining compensation. A nonprofit is required to publicly disclose the compensation of key employees, but there’s no such requirement for a privately held for-profit entity. In addition, a subsidiary can attract and keep highly skilled employees in ways that are unavailable to tax-exempt entities, such as through profit-sharing and stock compensation.

For example, the FCA bakery might want to hire a well-known expert to formulate a special recipe for multigrain bread. If the FCA forms a bakery subsidiary, it might be easier to create a compensation package that will attract a top chef.

Access to financing is yet another plus. Banks are typically more apt to lend to a for-profit entity. And private investors can invest in such an entity — an option unavailable to nonprofits. Finally, a separate entity can keep certain legal and uninsurable risks of the commercial activity away from the nonprofit.

Pinpoint the Pitfalls

Despite the potential pluses, setting up a for-profit subsidiary comes with pitfalls. The not-for-profit needs to ensure that it has established and is maintaining a separate identity for the for-profit or it will endanger its tax-exempt status. Also, if the for-profit subsidiary is a corporation owned solely by the nonprofit, any profits paid as dividends to the parent will be limited to the amount left after paying tax at the normal corporate rates.

The nonprofit also must have a realistic idea of what taking on a for-profit endeavor will mean for the organization. Establishing a separate entity has its own costs and complexities, such as management, personnel, tax, audit and other requirements.

Get Help

If your organization is considering a for-profit subsidiary, seek legal and tax advice at the onset. You’ll need to decide, for example, if the C corporation structure — the most popular structure for for-profit subsidiaries — is right for your goals. Forming a limited liability company is another option, although the tax consequences are quite different.

Additionally, your CPA can help you conduct a feasibility study. If your idea survives, he or she can assist you with your business plan and work out how to capitalize your endeavor.

Be Aboveboard and Business-like

Care must be taken to handle all business transactions properly. Neither the subsidiary nor the nonprofit should distribute to the nonprofit’s board members or key employees any amounts above fair compensation for the services or products received. That action could be considered an excess benefit transaction and is strictly prohibited. Any transactions between the parent and subsidiary, such as rental of shared space or sales of intellectual property, need to be at arm’s length and supported by independent valuations when significant.

Nonprofit executives who’ve successfully created for-profit subsidiaries report that hiring employees with relevant business experience is a key to success. Nonprofit employees — skilled and talented as they may be — often lack such experience and a profit-driven focus.

Be Careful

Creating a for-profit subsidiary can be a good way to help fulfill your not-for-profit’s funding needs. Just be realistic and make sure that your new funding source doesn’t jeopardize your organization’s tax-exempt status.

Tips for Contacting Your State Legislators

Many nonprofits nationwide continue to be plagued by state budget cuts. While you may want to petition your legislators for a break, do you know what to say — and what might work — to keep that grant money coming in or to get that state contract renewed? Here are a few suggestions:

1. Act promptly. Monitor state legislative activities year-round so you’re among the first to learn of proposed budget cuts that will affect your not-for-profit. And stay informed of your legislators’ positions. Then write, call or arrange to meet with them right away to indicate your support or disagreement with their stand. If you wait too long to respond, the deal may already be done.
2. Fine-tune your message. When you communicate with legislators, avoid vague concepts such as “helping the community.” Now is the time to talk about your program results — be succinct and mention your strongest outcomes. And provide at least one real-life example. Let’s say that your job-training program enabled a poor single mother to get a job and, hence, stop her family from being evicted from their apartment. Include these details in your story and perhaps a picture of the family or a testimonial. Estimate how much it would cost the state to support this family vs. what it paid your organization for the mother’s clerical training.
3. Stand up as an employer and an economic driver.Let your legislators know how many jobs your not-for-profit provides. For example, your nonprofit gainfully employs 90 residents (and voters) in their district. If the state cuts your funding, you’ll be forced to cut jobs. If your nonprofit drives the local economy in other ways, talk about those, too. For instance, your museum attracts 50,000 out-of-town visitors a year, who spend approximately $4 million shopping and dining nearby.
4. Boost your political muscle. Consider joining forces with other organizations — both local and national. This can help you gain the attention of legislators, especially if your nonprofit is small.

News for Nonprofits

Board Members Get Low Scores in Fundraising

If you feel let down by the fundraising efforts of your board of directors, you’re not alone. According to recently released study results, a significant number of chief executives say that, while board members are good at giving money from their own pockets, too many are wallflowers when it comes to asking for donations.

The Nonprofit Governance Index, conducted every two to three years by BoardSource, identifies trends in board policies, practices and composition. Of the more than 1,300 chief executives and BoardSource members who responded in 2012, nearly three-quarters said that the rate of personal board giving at their nonprofits is high, at 90% to 100%.

But while expectations for board members’ fundraising involvement have risen in recent years, only 41% of the chief executives “agreed” or “strongly agreed” that board members are comfortable asking for money directly. And 40% of the respondents indicated that their board “has been reluctant to actively participate in fundraising and relies mostly on the CEO and staff.”

The chief executives ranked fundraising as the weakest area on a “board report card” and cited it as the area of board responsibility most in need of improvement.

What can you do to get board members to actively fundraise? According to the study, it’s not a matter of outlining their responsibilities — three-quarters of the respondents “agreed” or “strongly agreed” that “expectations related to fundraising are clearly explained during recruitment.” Perhaps chief executives can do a better job encouraging board members to raise funds and providing on-point training on how to make “the ask” after they join the organization.

“Innovations in Philanthropy” Summit Brings Leaders to Capital

Strategies to get more donors to pipe their money into for-profit businesses that foster social missions was among the subjects discussed at a Sept. 21 private forum on innovations in philanthropy at the White House. Jean Case, the event’s keynote speaker and chief executive of the Case Foundation, said that uniform standards for tracking and measuring success would be needed to get more people involved in “impact investing.”

A “crowd-funding” idea, presented by the founder of Benevolent.net, a year-old nonprofit, was a standout philanthropic innovation presented at the meeting. The nonprofit provides a Web-based platform for people to post their individual needs, such as beds for their children or help finding a job. Then, with the assistance of a local nonprofit, Benevolent.net verifies that the request is legitimate. Individuals can make tax-deductible donations through the same nonprofit to help that person on the Benevolent.net website.

IRS Circular 230 Disclosure

Treasury Regulations require us to inform you that any Federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

About Michael McNee