Sheryl and I have incorporated several charitable gifts into our estate plan. Like most donors making future gifts, we’ve had a lot of experience with those respective institutions and have invested a lot of thought and prayer into the planning process. We considered the same questions that I ask other donors, “What will we need for the remainder of our lifetimes?” Consequently, those gifts commitments are technically revocable. In our minds, however, we have no intention of revoking anything. If we were at all tentative about these gift commitments, we would never have formalized them into a legal document. And neither gifts were contingent upon personal recognition. We were and are simply appreciative for what those institutions have done for us and the community.

Some planned gifts are negotiated with some kind of agreed upon recognition. Two of our future gifts are like that—memorials to my father and to an infant grandson we lost. More often, the recognition of a future gift commitment is simply a matter of courtesy. That does not mean the appropriate recognition is not important to the donors—as it was for a couple with whom I worked with a few months ago.

WHAT WERE THEY THINKING?
My clients were modest but regular contributors to the wife’s alma mater. Since they were over age 65 and had no children, their intention was to leave a large portion of their estate to that university. They sent a letter notifying the institution of a $3 million bequest included in their estate documents.

If we were at all tentative about these gift commitments, we would never have formalized them into a legal document.

The vice president sent back a thank-you letter saying that after discounting the present value, the university would recognize the bequest as a $700,000 commitment. Most donors have no idea about formulas for discounting revocable commitments of future gifts and could care less. All this couple understood was that the value of their $3,000,000 commitment was “discounted” over 75%.

I can’t imagine what the vice president was thinking when he wrote that letter. It would have been just as simple to have acknowledged the bequest at face value and say, “Thank you so very much!” Unfortunately, donors do get letters like this, which simply reveals how out of touch some executives are with the people who fund their organizations.

It was an interesting way of stating the case: “We are dis-counting the value of your commitment,” and on this occasion, the donors took it very personally. On my next scheduled visit, they showed me the vice president’s letter and a letter of their own in which they replied, “Don’t worry about the $3 million or the $700,000.” The donors had decided to redirect the $3-million bequest to a local hospital. By the way, the hospital valued the gift at $3 million for recognition purposes.

COUNTING VERSES ACCOUNTING
Donor recognition is just one of the issues of an ongoing discussion over the last several years with regard to revocable commitments for future gifts. The issues are:

• How accountants should and should not count planned gifts on a balance sheet (i.e. by FASB accounting standards);
• How institutions should recognize planned gifts (i.e. face-value for donor relations); and
• How they should count future gift acquisition (i.e. for staff performance evaluations and long-term planning).

“We are dis-counting the value of your commitment,” and on this occasion, the donors took it very personally.

I’ve been privileged over the last few years to be a part of those ongoing discussions with industry leaders as a part of the Partnership for Philanthropic Planning’s (PPP) Leadership Institute. PPP and two other leading associations, Association for Healthcare Philanthropy (AHP) and Council for Advancement and Support of Education (CASE), have published best-practices standards.

FOUR BUCKETS
Most successful nonprofit fund development programs now track overall fundraising performance in three distinct buckets. I’ve added a fourth bucket.

BUCKET #1—unrestricted income. The source is primarily habitual donors who make regular gifts to the annual fund. The funds are usually unrestricted and go to operating expenses.

BUCKET #2—restricted income. This is typically a mix of current dollars for some kind of capital campaign as well as future gift pledges for Bucket #4.

BUCKET #3: Matured Future Gifts. These are typically bequests or planned gifts that have come to the organization as current dollars because of a death.

BUCKET #4: Unrealized Future Gifts. These are usually revocable future gift commitments of which the nonprofit has been notified. These gifts are not counted as income on a balance sheet. However, internally they are discounted to reflect an estimated value in current dollars and tracked as a measurement of staff performance. Externally, future donor commitments are acknowledged at face value.

It’s impossible to measure the overall fundraising performance in terms of a single number—current dollars raised (FASB Standards). With the one-number approach, bequest and planned gifts are not counted at all because they represent unrealized income or “future pledges.”

Institutions with a long and successful history of fund development on average see as much as 25% of their annual income from realized bequests and planned gifts.

On one level, it makes sense not to “count your chickens before they hatch.” But the nature of soliciting planned gifts (like raising chickens) is such that you better keep very close tabs on the number of eggs in the incubator. If you’re not counting and managing the unhatched eggs, your organization could unknowingly be headed for trouble. Not every egg hatches a chicken and not every revocable gift turns into cash. It usually depends on whether or not they are properly incubated.

Institutions with a long and successful history of fund development on average see as much as 25% of their annual income from realized bequests and planned gifts. By “on average,” I mean these future gifts are realized only when someone dies—an unpredictable occurrence. With a one-number method of measuring fundraising performance in terms of current dollars, the numbers fluctuate radically. Of course, those most successful institutions are the ones that 1) have continued to fund activities to nurture these donors as they focus on future gifts, 2) continue to cultivate (incubate) those donor relationships among those who have made bequests, and 3) that track and recognize the contributions of staff who are cultivating future gifts not reported on the balance sheet.

The example above illustrates the potential impact of counting (or discounting) planned gifts on external relations—i.e. recognizing future commitments by donors. Internally, the long-term impact of tracking future gift commitments on budgeting, future planning, and staff performance evaluation can be even more significant. Next month I’ll say a few more things about how counting or not counting future gift commitments impacts organization decision-making at the highest levels.

Eddie Thompson, Ed.D.
Founder and CEO, Thompson & Associates
Copyright 2016, R. Edward Thompson