All Bequests Are Generous; Some Can Also Be Smart

Those of you with an oil-burning furnace may be familiar with efficiency percentage tags.

If you don’t heat with fuel oil: When the oil company maintenance crew comes at the beginning of each winter to service your furnace, they leave behind a tag declaring its operating efficiency. If the tag reads 90%, you’re doing really well. If the tag reads 60%, it’s time to get a new furnace. You’re wasting a lot of fuel.

If I were to hang an efficiency tag on charitable bequests, most would be around 75% — and a few would be at 15%.

Some bequests simply go into the endowments of the organizations without any sort of specificity. That’s not so bad. Those bequests are not exciting, and like most gifts to endowments their real impact is largely deferred, but they do provide long-term support.

Some bequests are borderline disastrous. A bequest that is overly specific – and not pre-approved by the nonprofit organization – can cause the organization to reorient its strategic priorities. It can even tie the organization in knots.

One example of a seemingly wonderful bequest that created all sorts of challenges for the beneficiary because of its over-specificity was Joan Kroc’s $1.5 billion bequest to the Salvation Army. Mrs. Kroc, widow of the founder of McDonald’s, directed that the funds go toward the creation of “Kroc Community Centers” around the country. She further directed that 50% of the money be put in endowments for the centers, and that the Salvation Army raise a matching amount locally to double the endowment for each center.

This was not a gift made in heaven. The Salvation Army, left to its own devices, had not been planning to pursue the creation of new community centers. The Salvation Army also faced the significant burden of raising the matching money, though there was some skepticism that even that amount of endowment money would fully support the centers. Finally, the receipt of such a huge sum undermined the public perception of their work as going directly toward basic needs of the poor. Nevertheless, it’s not easy to turn down $1.5 billion, so the Salvation Army accepted the funds without renegotiating the terms. (Ironically, one of the things that had attracted the Krocs to the Salvation Army in the first place was how efficient their operations were and how much of the funds raised went directly toward services for the needy.) It’s worth noting that Mrs. Kroc also left $200 million without any significant strings attached to National Public Radio, a gift that by all accounts has been nothing but a boon for NPR. So one of her bequests earned an efficiency tag of, say, 15%, the other of about 95%. Go figure!

I doubt that any of you are in a position to match the generosity of Joan Kroc, or to cause the kinds of problems her benevolence inadvertently created. But whether you are a donor or someone working with donors, you should think about how bequests could and should be structured. And believe me: there are other paths you can follow to create a higher efficiency ratio.

Here’s a good example.

I got a call the other day from my friend Anne. Anne is as thoughtful about philanthropy as anyone I know. She and her husband Arnie have significant assets that they want to give to organizations they care about, but they want those gifts to make a difference. They want to help the organizations do things they couldn’t do otherwise, but they don’t want to control from the grave, or have their contribution inadvertently hurt the organization, or have minimal impact.

One thing they worry about: that the size of their gift might swamp a small organization or distort that group’s way of doing business. They fear that that the organization might get fat and happy – and stop looking for other gifts and donors. They also are not fond of endowments. “Why lock the money up so they can only use 5% a year?!” Anne asked me.

Anne floated some innovative thoughts on structuring their bequests. Here are the three I liked best:

  • Anne and Arnie could make a significant bequest to an organization to create a fund to be used for operations – but the organization could only use 12.5% of the total fund each year. That would give the organization eight years of a significant boost to their operating budget – an injection, over a good period of time, of the kind of money that’s hardest to raise. That would free the organization to pursue important projects, without taking them completely off the hook for raising other operating money. And all the money would be used for program purposes within a few years – something that appeals to Anne and Arnie.
  • Anne and Arnie could give a gift for a capital campaign… the purpose for which is yet to be determined! That is, the organization could hold their funds until some future date, at which point their board could designate it toward a worthy new capital campaign. (Given how important it is in a capital campaign to have a leadership gift, Anne and Arnie would be giving them a built-in lead gift – years in advance.)
  • Anne and Arnie could create a fund to be applied toward the start of an important  new program initiative that the organization would otherwise be nervous to undertake. The particular purpose would be left in the hands of the organization’s board of directors and would be decided at some future date. (Anne also liked the idea of requiring that the organization raise matching funds from new donors as a way of building community support for the new initiative.)

It was so refreshing talking with Anne. Charitable gift planning can be flawed. With families of considerable means, the structure of their charitable bequests often doesn’t get the attention that other aspects of estate planning receive. The result can be bequests that are inefficient or difficult to administer.

But in these examples, Anne and Arnie are contemplating gifts that provide both a boost and an incentive. They trust the nonprofits to use the funds where they can make the most difference. Anne and Arnie are funding creativity, expansion, and impact – without dictating terms. This, in the often rote and dreary world of gift planning, is itself an act of tremendous creativity. If I were the oil burner repairman filling out the efficiency tag on these kinds of bequests, I’d rate them 100% — and believe me, I’m a tough grader!

Care to share any good ideas that you’ve seen out there?

Copyright Alan Cantor 2012. All rights reserved.

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