Is Your Nonprofit Making Use of Legacy Funds?

April 20, 2015

Most nonprofits struggle with maintaining sufficient ongoing funds for operations. Donations and grants go up and down annually, often influenced by factors outside the organization’s control.

Nonprofits of all sizes are realizing that they are leaving a source of funding on the table, one that maximizes the loyalty and goodwill they’ve so diligently created. That funding source is a legacy fund.

A legacy fund falls under the larger umbrella of planned giving and specifically refers to bequests to the charity upon a donor’s death. Giving USA reports that, in 2013, giving by bequest totaled $27.73 billion. This amount represents 8 percent of all giving that year and also reflected an increase of 8 percent in that category.

Legacy giving is rising, in large part because of the pending retirement of the largest generation ever born – the Baby Boomers.

Gifts are often a sum of cash, but life insurance proceeds, property, stocks and retirement plans are also options. Artwork and other valuable items can also be bequeathed to a charity.  

Many people don’t realize the full range of options, especially if any cash is earmarked for family members. A little-known option is donating your home but continuing to live in it until death, when ownership transfers to the organization.

Often a legacy fund pools gifts into an endowment fund. Endowment funds can either preserve the capital or allow a certain amount of the principal to be released each year. In either case, interest or income generated is used for a specified purpose.

Examples include scholarships, capital projects or specific activities and programs. Many nonprofits can benefit from an endowment that allows them to defray ongoing operating costs, one of the most difficult categories to support through grants and donations.

Before embarking on the creation of a legacy fund, there are a number of considerations.

Is the organization ready? The most successful initiatives grow out of well-established nonprofits with a strong donor base and board and sufficient infrastructure. Legacy funds are set up for the long-term and planning and implementing one can be a lengthy process.

Do you have the necessary expertise? Gifts of cash are relatively straightforward, but other assets require special knowledge to value and handle their disposition. In addition, there are tax implications for the donors with every type of gift. Being able to communicate those in an understandable manner is critical. Once the fund is established, expertise is needed to manage the funds properly.

What are the fund goals and uses? These need to be determined in advance so that the benefits and purposes can be communicated to potential donors. Prepare long-range forecasts of operating and capital needs so your fund will be targeted properly.

Creating a plan for setting up and operating your legacy fund is a good first step. This will allow you to identify the resources needed at every stage so you can ensure that the fund, even if it starts small, is on a solid footing and funds are managed properly.

The first step is educating leadership staff, board and development personnel in the basics of legacy gifts. The advice and input of key large donors can be sought to help create the best structure and approach. What are the activities and impact of your organization that create the most buy-in from donors? Are there groups of donors with different interests?

An example might be a school, with some donors wanting to fund scholarships for needy students while others are more focused on specific programs, such as music, art or science.

Professional expertise must be lined up in advance. Legal, tax and investment help are all necessary. This may be tapped through consulting arrangements or by working with an existing foundation that can manage your fund.

Be wary of relying on board members or volunteers for anything but initial input. There is a great deal of trust accorded to you as the holder of a legacy trust, and everything about the fund’s operation must be impeccable. There will be costs, but setting up a reliable stream of income lightens the fundraising burden in future years.

Before approaching donors, you will need a communications plan, marketing materials and the resources to meet with donors one-on-one. Phone calls cannot substitute in discussing such personal matters as bequests and financial assets.

Recognize that, just as legacy funds are new territory for many nonprofits, they are also unfamiliar to most donors. They need to understand the implications of each option thoroughly, and they need to trust that you will carefully manage their precious legacy for generations to come.