Editor's Note: This is the first of two articles based on a study of affluent clients and planned giving that encompasses the way they give now, how they want to give and how financial advisors can best partner with them. The research was commissioned by Merrill Lynch and conducted by Prince & Associates.
In 2000, Americans contributed more than $200 billion to charity, according to the American Association of Fundraising Counsel. In the coming years, as the parents of baby boomers die and trillions of dollars pass from one generation to the next, the ability and the desire to give will only increase. Indeed, one of the very few positives to come from the tragedy of September 11 is the reminder that Americans will rise to an occasion by reaching deeply into their pockets and generously donating to a compelling cause.
Despite the prevalence of giving, however, and the many benefits, most people donate money in a haphazard way, often writing checks at year-end or tax time that have more to do with last year's income than their long-term charitable goals. The idea of an organized approach to charity-planned giving-is something that many donors are only slowly coming to understand and take advantage of.
To learn more about the way that affluent clients approach planned giving and what they expect from their financial advisors, we surveyed 519 high-net-worth households with estates worth at least $1 million, excluding the value of their primary residence. The story on the client side is that almost everyone already gives to charity in some way, and most of them want to initiate a more formalized, planned-giving program. But they are held back by a limited knowledge of the many charitable options available to them and a lack of understanding as to which ones will best suit their financial lifestyle. Above all, they want to get more guidance from their financial advisors about the best way to give.
Studies of charitable donations invariably show that the No. 1 reason for giving is the most laudable one: to help others. Whether they are millionaires or just getting by, people genuinely want to give something to any number of causes, including the less fortunate, their local firefighters and the battle against diseases. Understandably, affluent Americans also want to take advantage of the many tax and estate planning benefits that are associated with charitable giving.
As noted, baby boomers will be inheriting trillions of dollars from their parents in the coming decade. Further, although it's hard to remember in the wake of the Internet bubble, anyone who has owned stocks over the last quarter century has seen his or her portfolio's value dramatically increase. The fall of the technology and dotcom stocks took back the huge profits of the late 1990s, but it couldn't undo years of steady equity-market growth. As a result, when it comes to giving, people already have a lot of money to work with, and they stand to have even more through inheritance. Not surprisingly, those people want to find ways to fulfill their charitable intentions, often within the context of a workable financial plan.
The New Donors
At the same time that more Americans have become wealthy, the profile of the charitable donor has changed. In previous generations, organized charity was the province of the super rich-the Rockefellers, Morgans and Carnegies who formed foundations and saw their names chiseled in granite. Today, organized charity has been democratized to satisfy the expectations of a new generation of donors, and they're a force to be reckoned with in terms of the amount of money they will give and the way they will give it. These are the same people who have changed the way that financial advisors work with their clients because they're young, heavily invested in the stock market, financially astute and generally far more involved in their financial affairs. To meet their demands, there are now many more ways to give than ever before, including donor-advised funds, socially responsible investing and an alphabet soup of trusts. Many of these new options fall under the heading of planned giving.
What Is Planned Giving?
First, it's important to distinguish planned giving from charitable contributions in general. "Unplanned giving" is generally thought of as direct, small and irregular cash contributions to charity, say $100 to the local animal shelter every other year. Broadly speaking, unplanned giving is also less well-thought-out and often depends on how much money people have to spare when solicited.
Conversely, planned giving usually is part of an organized, ongoing and long-term approach to charity. Unlike unplanned giving, it may involve assets such as stock in addition to cash contributions. Planned giving is designed not only to benefit the charitable organization, but also to give the donor such benefits as current tax deductions, avoiding capital gains taxes and reducing estate and gift taxes. As such, planned giving usually requires the involvement of an advisor, consultant or attorney. (Given the many benefits of planned giving, it's not surprising that the number of nonprofit organizations in the United States passed 2 million in the last decade and that many of those organizations have put planned-giving programs in place to attract donors.)
In our survey, planned giving included the following: charitable bequests, life insurance, gift annuities, pooled-income funds, charitable-remainder trusts, charitable-lead trusts, supporting organizations, donor-advised funds and private foundations.
The first salient fact from our survey was that almost every household, 94.3%, annually contributed to charity in some way. It also was interesting to note that 79.2% were interested in teaching philanthropy to their families and getting them involved at some level. However, only 33.5% had made planned gifts, most probably because they didn't want to take the time-they want instant gratification from their giving-because they didn't know how planned giving would fit in their financial plans, and they didn't fully understand their options and the many advantages of planned giving.
For those households that had made planned gifts, the charitable bequest was the preferred approach, probably because adding a line or two in a will was a fairly simple, understandable and revocable act. In fact, take away the charitable bequest, and fewer than one in five of the 519 households surveyed had made a planned gift, despite their interest. And the majority of those households that made charitable bequests, 87.7%, gave cash rather than stocks or other noncash assets, which again shows a lack of understanding of their options and probably the absence of a consultative approach on the part of their financial advisors.
The relative infrequency of planned gift contributions did not signify any lack of interest or desire, however; 76.2% of the households wanted to learn more about their charitable options, and 81.7% wanted to give more. There was also considerable interest in specific planned gifts. But people were constrained by concerns that doing so would adversely affect their financial situations and lifestyles. This is another indication of an absence of awareness on the part of the affluent-and a lack of involvement on the part of advisors-because effective planned-giving programs would result in tax and estate benefits that would, in fact, improve financial situations and lifestyles.
It is interesting to note that when people do consider planned giving, private foundations far and away top the list of ways in which they might contribute, probably because of the aura of philanthropy and the desire for today's investor to be in charge. Indeed, some studies of today's givers have found them to be not only very interested in retaining control of where their money goes and how it is put to work, but also to be somewhat skeptical of the effectiveness of large charitable organizations.
The Role Of The Advisor
In sum, the affluent are very interested in planned giving, but they don't know how to go about it. In the same way that investing has become far more complicated because of the amount of information and the number of available options, so too has charity. Affluent donors need help-and they expect their financial advisors to answer the call.
(Next month, we will see how advisors work with their affluent clients when it comes to planned giving and how those clients think the partnership could be changed for the better.)
Hannah Shaw Grove is managing director and chief marketing officer of Merrill Lynch Investment Managers. Russ Alan Prince is president of the consulting firm Prince & Associates.