We all know the phrase “cash is king”, but what does that mean in the midst of stressful times such as we are now experiencing with COVID-19?
As we consider group meetings, working from home and washing our hands continuously, life goes on. For some, the quarantines and public gathering limitations will create financial stress. Restaurants, airlines and of course cruise ships would all fit into this category.
But for others, this will simply be a momentary pause.
During this season, as we see interest rates at the lowest in our lifetimes, some assets will still sell. A friend of mine has had his house on the market for several months and although he received an offer that is much lower than his anticipated selling price, he plans to accept that offer because of the uncertainty of the future.
So, how does this relate to your donors, the folks who sustain our non-profits?
Example: We are currently working with a donor who is selling a business. His business has been growing by double digits for years. Their earnings in 2019 were more than $21 million. Just a few months ago, they would’ve expected a selling price of between $100 and $120 million. But today, in this uncertain environment, they plan to accept an offer of roughly $80 million, or 4 times their profits. Not ideal, but a reality in these times.
This donor and his wife are in their early 80s. He is on the Board of Directors of a major international charity and are very generous to that organization and many others as well. Let’s look briefly at what happens if he sells this business outright, fully exposed to long-term capital gain taxes versus if he sells it through proper legacy planning.
If he sells it outright, assuming it is an all cash offer, his portion of the company worth about $30 million would be taxed at federal and state levels of roughly 29%. This will leave him with a net after-tax of $21,300,000. If he were able to earn 5% on those funds it would equal $1,065,000 per year in pretax income for his remaining retirement years.
Fortunately, our client charity introduced us some time ago. We have been working on both his anticipated business sale and his estate plan and were able to execute documents a few months ago. At this point, he has established a charitable remainder trust as well as a donor advised fund in anticipation of this sale. His plans are to put 40% of his company ownership into the charitable remainder trust prior to sale. He will also put 10% of his company stock into the donor advised fund prior to sale.
This would leave he and his wife with 50% of the company to be sold outright. Normally, this 50% would be subject to long-term capital gain taxes, however because of our planning he will receive charitable income tax deductions of $8,900,000. The result of this will be the 50% sold outright will pay no long-term capital gain taxes, leaving them the full $15,000,000 to invest.
As a result of anticipating a sale and proactively doing strategic legacy planning in advance, these donors will now have more income during retirement years, the ability to make current gifts to their favorite charities as well as legacy gifts in their estate. See the summary below.
Net after tax – $21,300,000
Income at 5% – $1,065,000
Gift to charity – $0
Strategic Legacy planning
Net after tax from 50% sold outright – $15,000,000
Plus 40% sold through CRT @ $12,000,000
Income at 5% – $1,350,000 (combined)
Gift to charity – $3,000,000 via DAF and $12,000,000 from CRT
Please Don’t Assume
Perhaps the biggest obstacle we must overcome as we work with charity executives is their assumption that high net worth donors “have all this planning done already”. The facts are that your high net worth donors became successful by identifying a product or service and focusing like a laser on that business. But for the vast majority of them, liquidity planning as part of a philanthropic strategy is a foreign language. This gives you an opportunity to serve them while also creating milestone gifts for your organization.
It is not intrusive nor is it crass to help a donor reduce taxes and increase their retirement cash flow through smart legacy planning. And, if they can also benefit their favorite charities versus sending millions of dollars to Washington D.C. – so much the better.
Tangible steps you can take
OK, so let’s assume that the message in this article has caught your attention. What are some practical steps that you can take? I would suggest there are three steps toward strategic legacy planning.
- Analyzing data
- Communicating with your benefactors
- Focusing on the relationship
1. This message of pre-sale planning for liquidity events is not something that you would mass market to 25,000 donors. Note: in our next article we will look at practical ways you can address the Middle America segment of your donor base during this Covid-19 pandemic. But within most databases, there will be a few donors (2-5%) that can identify with these issues. So how do you identify those donors?
There are several successful methods for identifying prospects for gifts of complex assets among your constituents. Predictive modeling focused on finding principal and planned giving prospects, wealth identification techniques that center on business, stock, and/or multiple property ownership as well as high-end giving to other nonprofits are some of most proven strategies.
Lawrence C. Henze, J.D.
Analytics Architect, Senior Principal Consultant
Blackbaud Target Analytics
2. Communicate with your donors. During stressful times, your business owner donors are even more intensely focused on “keeping the ship upright during the storm.” But in the midst of that you can communicate two things to them. First, the compelling mission and vision of your organization. Remind them as to why they are involved. Give them a recent uplifting story of a successful example of your organization’s mission or impact. Second, remind them that for their own benefit during this stressful time, making current gifts to charity out of appreciated assets versus cash will help them protect their cash position and retain the strength of their organization rather than depleting business cash resources.
3. Perhaps most important of all is to maintain the relationship. During these times when hopping on an airplane and flying across the country is probably not going to make sense, take advantage of technology using communication tools. Two of my personal favorites are Zoom (Zoom.us) and BombBomb (BombBomb.com). You’ll be amazed at how appreciative donors can be of a quick one-minute video email using BombBomb or as I said to one donor this morning, “in lieu of getting together, why don’t we set up a Zoom video call and have a ‘social distancing’ cup of coffee?” He laughed and quickly accepted the invitation.
The bottom line here is to encourage you to make lemonade during these stressful times. Look for ways that you can maintain relationships; communicate the vision of your mission while at the same time offering helpful information to those who might benefit from protecting their cash by gifting assets or by enhancing their financial outcomes during a liquidity event. Remember, Cash is King.