Bad Times for Charities?

Giving will continue but not quite as much—and certainly the form will change

Of all the many losers in the current financial maelstrom, charities and charitable giving undoubtedly are near the top of the list. As the assets of foundations and individual donors plummet and credit gets ever-tighter, one inevitable victim will be the ability to make charitable contributions. “We’re in for a very dry stretch,” says Benjamin Pierce, executive director of the Vanguard Charitable Endowment Program in Malvern, Pa.

The economic crisis also hit at a particularly vulnerable period—as most charitable giving happens in the last quarter. “This is the worst time of year for charities” to have donors so worried about their finances, says David Leibell, a partner with Wiggin and Dana, a Stamford, Conn. law firm., who specializes in trusts and estates.

And yet—past experience teaches philanthropy experts that American giving still will continue. Since 1967, total contributions to charity from individuals have increased every year, including during recessions, albeit at slower rates, according to Giving USA Foundation, a Glenview, Ill.—based research group. The one exception was 1987, when the drop was slightly more than 1 percent. Philanthropy continued even during the Great Depression, according to Robert Sharpe, Jr., president of the Sharpe Group, a Memphis firm that provides support services to not-for-profits.

The difference is, the experts note, that donors will give less now and, maybe more later. Instead of lifetime gifting, for example, they’ll tend more toward bequests.

DAFs Down
Already, there are some troubling signs. Take donor advised funds, or DAFs. According to Pierce, Vanguard set up 20 new DAFs in September, half the number started in that month in 2007. This, he says, is the biggest decline he’s seen in years. What’s more, donations of appreciated stock, which account for 60 percent of total funds in DAFs, also have dropped precipitously.

Private foundations may be particularly hard hit. During the past 40 years, the average rate of growth in recessionary periods for private foundation giving was .5 percent, compared to 11.5 percent in non-recessionary years, according to Del Martin, chair of Giving USA. Smaller foundations are most likely to slash the amount of money they give. Of course, by law they must disperse a minimum of 5 percent of their assets each year. But, thanks to stock market declines, those holdings will be much reduced and, as a result, so will the amount they’ll be obligated to give away.

“We have seen foundations that have been cut in half—or more—by their exposure to financial stocks,” says Roger Silk, CEO of Sterling Foundation Management, a Reston, Va.-based firm that provides consulting services to private foundations.

A recent survey of 200 staff and board members of the Association of Small Foundations found that nearly one-quarter will reduce grant making through this year.

The larger organizations are not immune—especially those heavily invested in hard-hit stocks. Probably the most notable in this category is the Starr Foundation. Created more than 50 years ago by Cornelius Vander Starr, it has the bulk of its endowment invested in AIG stock, which has dropped more than 90 percent in the past year.

: “Aside from cost-cutting, according to Silk, charities are also turning to other ways to keep operations going. For example, he’s seen more interest in selling such hard-to-sell assets as future interests, remainder interests in charitable remainder trusts, and lead interests in charitable lead trusts. (

How They’ll Give Now
Not all sectors are likely to feel the effects with equal severity. During recessionary periods, individual contributions to educational institutions tend to drop. But giving to human services and public charities increase. In 1994, for example, when total donations rose by just 2.9 percent, contributions to educational organizations dropped 1.1 percent, but those made to human services rose 2.2 percent, according to Giving USA.

For all the market drops and fear, the wealthy still have quite a bit of money and big donations are still happening. Pierce reports that over the last three weeks, Vanguard has received three multi-million dollar gifts. One, which he described as “very large,” was in stock, while the other two, in the “$5 million to $10 million range,” were in cash.

When giving does take place, the experts say, the big change will be that less of it will be in relying on appreciated stock, because falling share prices mean that donors won’t benefit from market-value tax deductions. But that means, says Pierce, that “the flip side of the coin is now more attractive.” He expects to see donors sell stock, take a loss, give the cash to charity, and get a tax deduction. Indeed, Eileen Heisman, president and CEO of National Philanthropic Trust, an independent public charity in Jenkintown, Pa., reports that after the post-9-11 crash, there was a significant rise in cash gifts.

Sharpe also expects to see an increase in bequests and in charitable lead trusts (CLTs). “They’ll make it possible for donors to fund significant gifts over a long period of time and still have money go to their children,” he says. In fact, he expects CLTs to be used in place of setting up family foundations, because with the latter choice, the family doesn’t have access to the assets. “With a lead trust, the children get the money eventually,” he says.

There’s also another option. Buried in the $700 billion bailout bill is an extension of provisions for charitable giving using IRA or ROTH IRA rollovers for 2008 and 2009. Individuals can donate or transfer rollovers up to $100,000 to public charities, Leibell notes.

What Does Future Hold?
If the market gyrations continue through 2009, Sharpe says, there will be more of a pull-back. “It generally takes a couple of years after a downturn before you see a big drop in giving,” says Sharpe.

The mirror image also is true, Heisman says: “People have to perceive a change over a period of months before they feel confident enough to start donating.”

Of course, when the uptick will happen is anyone’s guess.
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