Using Planned Gift Projections Wisely

Planned giving software makes it very easy to estimate the benefits of a particular gift plan over its expected life. Just plug in the facts of the gift, make some simple assumptions about future investment returns and the duration of the arrangement, and voilà, out comes a presentation that describes the projected benefits of the plan in convincing detail.

Used wisely, gift plan projections are a powerful educational tool for explaining the operation of vehicles such as gift annuities, charitable remainder trusts, and charitable lead trusts, as well as illuminating how they differ from each other. Used unwisely, however, gift plan projections can give prospects too rosy a picture of the benefits they can expect or mislead them into thinking a certain level of benefits is assured when it is not. The plunge in the markets in 2008 and 2009 brought this issue into stark relief for many gift planners as they have scrambled to soothe the concerns of donors over shrinking payments and plummeting remainder values.

How might gift planners approach the creation and presentation of projections so that they set the most positive and realistic expectations?

Two variables

There are two aspects of a typical life income arrangement that a gift planner cannot know when creating a projection.

  1. How long the gift will last?  While we may be able to determine a life expectancy for the beneficiaries, that doesn’t tell us how long the arrangement will last. If the life expectancy of the beneficiaries is ten years, for example, there's a 50% chance the gift plan will last less than ten years and a 50% chance it will last more than ten years. The one thing we know is that it is highly unlikely the gift plan will last exactly ten years.
  2. How well will the assets in which the gift is invested perform during its term?  Investment performance can vary dramatically from year to year with profound, and sometimes humbling, consequences for the value of gift plan assets. 

What to do?
The key, we think, is to approach each planned gift projection not as a predictor of the future, but as an educational tool. Use projections to help you, your prospects, and their advisors acquire a deeper understanding of how a particular gift plan works and how it will respond in different investment environments. Showing a prospect or an advisor a single illustration that reflects the same investment return year in and year out does not achieve that goal.

Modeling gift plan results under varying investment assumptions shows that the timing of bad investment years can influence profoundly the ultimate benefits of annuity-type gifts and unitrust-type gifts alike. Demonstrating the effect of a bad year or two early in the life of the gift, especially in light of the economic shocks we all have experienced in recent years, will help establish in your prospect an understanding that investment results will affect the plan’s outcome and that no one knows exactly what that outcome will be.

Alternatively, providing illustrations that compare outcomes under different constant investment assumptions, such as 5%/year versus 8%/year, will also communicate to your prospect that plan results will depend on investment performance. Showing outcomes under different investment assumptions also will convey a sense of the range within which the proposed gift plan's long term benefits might fall. In past client surveys, we have found that many gift planners use this approach, which suggests that they find it an effective way to educate prospects.

You may want to consult the asset manager who invests your planned gifts to get some historical returns to use in your illustrations. If you do this, be careful to explain to donors that while the results demonstrate how the gift plan would have performed under past investment returns, its actual performance will depend on investment returns going forward.

No matter what investment assumptions you use, always emphasize the educational value of the projection, not its predictive value. Used prudently, projections can be a great tool for edifying your prospects on the operation and potential benefits of a planned gift.