Research from Bernstein Global Wealth Management
Global Wealth Management
When done right, the core/excess analysis gives the donor a
strong sense of what he or she can afford to contribute without
jeopardizing future lifestyle needs.
A Strategy for Capital Campaigns:
Adopt the Donor’s Point of View
In this paper, we discuss strategies that can help you work
with major donors who—whether rationally or not—feel
financially insecure.
At the launch of a capital campaign, you
will doubtless turn first to donors who are
passionate about your cause and have
made sizable gifts in the past. But in
today’s economy, converting a $50,000
gift into a $5 million gift is no easy task.
Following years of market turbulence and
economic uncertainty, even very wealthy
individuals who are deeply committed to
philanthropy are reconsidering their giving
plans. However strong their interest in
your cause, they will not part with assets
that they themselves or their beneficiaries
could conceivably require in the future.
In this paper, we discuss strategies that
can help you work with major donors
who—whether rationally or not—feel
financially insecure.
Display 1
“Core and Excess” Framework Can Help Overcome Donor’s Fears
Lifestyle Spending
Personal Reserve
Core Capital
Assets necessary to meet donor’s spending needs
Children
Future Generations
Charity
Excess Capital
Assets that are part of donor’s wealth transfer/charitable plan
How Much Can the Donor Afford
to Give?
Donors do not know how much they can
afford to give until they know how much
capital they will need for their own future
living expenses. Our proprietary core/excess analysis (Display 1) is a sophisticated
methodology for helping donors
distinguish between their core capital—
the amount they will need to maintain
their lifestyle plus a personal reserve—
and their excess capital—the amount
that they can safely transfer to family
members, donate to charity, or use for
other purposes. The size of core capital
depends upon the donor’s spending
needs and time horizon, as well as on
the composition of the assets supporting
spending. In our process, we stress-test
the risk and return possibilities for the
core assets, a wide range of potential life
expectancies, and the donor’s assumptions about spending needs.
When done right, the core/excess
analysis gives the donor a strong sense
of what he or she can afford to contribute without jeopardizing future lifestyle
needs. When you’re looking for a large
commitment from a donor, this can be a
critical first step.
Other Pursuits
Source: AllianceBernstein
Bernstein does not provide tax, legal, or accounting advice. In considering this material, you should discuss your
individual circumstances with professionals in those areas before making any decisions.
FEBRUARY 2012
Display 2
Core Capital Sized for Poor Markets and Long Life
$100,000 Spending, 60/40 Portfolio, Inflation-Adjusted*
8
6.8
6
$ Millions
Display 2 illustrates the core capital
requirement for a donor with a balanced
portfolio of stocks and bonds who plans
on after-tax spending of $100,000 a
year, adjusted annually for inflation,
over a 30-year horizon. As the middle
and top lines show, if the investment
markets turn out to be “typical” or
“great,” an initial portfolio of $3.3
million is estimated to be far larger than
necessary. Of course, most donors want
to be sure they will have sufficient core
capital even in the most hostile market
conditions. The bottom line in Display 2
indicates that even in the worst 10%
of future environments, approximately
$400,000 would remain in the portfolio
after 30 years of uninterrupted inflationadjusted spending. In fact, the initial
portfolio was successfully sized to
support spending in 95% of the 10,000
scenarios we forecasted.
4
2
3.3
2.5
0
Age
0.4
65
70
“Great” (Top 10%)
75
80
“Typical” (Middle 50%)
85
90
95
“Poor” (Bottom 10%)
*Annual (after-tax) budgets are grown with inflation; 60% globally diversified equities/40% intermediate duration
municipal bonds
Based on Bernstein estimates of the range of returns for the applicable capital markets over the periods analyzed.
Data do not represent past performance and are not a promise of actual future results or a range of future results.
See Notes on Wealth Forecasting System on page 5 for further details.
Source: AllianceBernstein
Display 3
A donor’s spending level dramatically
impacts the size of core capital. As
Display 3 shows, a donor with $20
million in liquid assets who plans to
spend $100,000 a year has a stunning
$16.7 million of excess capital. Even if
this donor planned to spend $500,000
a year, the excess capital would still be
substantial—more than $2 million. Once
the core and excess capital amounts
have been determined, the donor will
feel more comfortable committing to a
substantial gift, knowing that he or she
can afford it.
Balancing Gifts to Children
and Charity
The core/excess analysis helps donors
safeguard their core capital, but of
course donors also want to safeguard
some of their excess capital for transfer
to family members, charitable concerns,
or other beneficiaries. Here, too,
Bernstein can play a critical role. Most
2
Excess Capital Helps Determine Gifting Capacity
$20 Million Portfolio, Age 65*
$ Millions (Inflation-Adjusted)
2.3
Excess
Core†
11.3
16.7
17.7
8.7
3.3
Spending:
$100K
$250K
$500K
*Annual (after-tax) budgets are grown with inflation; 60% globally diversified equities/40% intermediate duration
municipal bonds
†The required size of the core portfolio assumes that spending needs will be met with a 95% level of confidence.
Based on Bernstein estimates of the range of returns for the applicable capital markets over the periods analyzed.
Data do not represent past performance and are not a promise of actual future results or a range of future results.
See Notes on Wealth Forecasting System on page 5 for further details.
Source: AllianceBernstein
donors doubtless assume that a dollar
given to charity is a dollar that cannot
be given to their children. But in fact,
with the right structure in place, gifts to
A Strategy for Capital Campaigns: Adopt the Donor’s Point of View
charity and children can actually enhance
each other. Today, the charitable lead
annuity trust (CLAT) is an especially
powerful tool for doing just that.
Display 4
Unique Planning Opportunity Today: Charitable Lead Annuity Trust (CLAT)
Section 7520 Rate
Percent
12
8
Average: May 1989 to Present: 6.2%
4
0
children without gift or estate tax. The
size of required annual gifts to charity
is directly related to prevailing interest
rates at the time the CLAT is established; the lower the rates, the smaller
the annual donations. And the smaller
the donations, the better the chance
that the CLAT will leave something
substantial to the children without
transfer tax.
February 2012: 1.4%
89
92
95
98
01
04
07
10
Source: Internal Revenue Service (IRS) and AllianceBernstein
Display 5
Significant Cost of Delay
Wealth Transfer per $10 Million for 20-Year CLAT: Median Values
$ Millions (Inflation-Adjusted)
10.2
2.9
Today’s Conditions
Normal Conditions
Strategies are funded with $10 million, and all assets are invested in 100% global equities (35% US value, 35% US
growth, 25% developed international, and 5% emerging markets). For “Today’s Conditions” the CLAT is funded at
the February 2012 Section 7520 rate of 1.4%. For “Normal Conditions” the CLAT is assumed to be funded at a
7.2% 7520 rate. Based on Bernstein estimates of the range of returns for the applicable capital markets. Data do not
represent past performance and are not a promise of actual future results or a range of future results. See Notes on Wealth
Forecasting System on page 5 for further details.
Source: AllianceBernstein
The CLAT is designed to make payments
to charity for a term of years, after
which any remaining assets pass to
noncharitable beneficiaries—typically,
the donor’s children or a trust for their
benefit. Effectively, this is a way to
pre-fund charitable donations. For
example, someone who typically gives
$50,000 a year to charity can pre-fund
a 20-year CLAT today with $866,954.
This amount is less than $1 million (20
years of $50,000 gifts) because the IRS
assumes a modest rate of investment
return. If the trust is structured to avoid
transfer taxes, at its termination, any
remainder interest—the appreciation of
the trust assets above the IRS’s assumed
rate of return—will pass to the donor’s
Today’s unusually low interest rates
create an extraordinary opportunity to
transfer assets by means of a CLAT.
Under the Internal Revenue Code, the
relevant interest rate for CLATs is the
so-called Section 7520 rate, which the
IRS derives from Treasury rates. The
Section 7520 rate has averaged 6.2%
since it was first established in 1989, but
as of this writing in February 2012 it
stands at just 1.4% (Display 4). At a rate
this low, the CLAT becomes an extremely
effective wealth transfer strategy.
Doubling the Charitable
Commitment
Display 5 illustrates how attractive
CLATs currently are relative to normal
initial conditions. For every dollar
invested in a CLAT today, a donor can
expect to transfer a dollar (inflationadjusted) to family. In essence, donors
can take the charitable gifts they
already plan to make, wrap them in a
CLAT, and get a substantial wealth
transfer benefit as well.
Due to their irrevocable nature, among
other reasons, CLATs are often reserved
for testamentary use. However, donors
who delay the funding of a CLAT will
likely miss out on today’s exceptional
conditions. Indeed, donors can currently
double their charitable commitment,
while still leaving a larger-than-expected
legacy for their children.
3
Display 6
The Pitch: Double Your Commitment to Charity While Benefiting Your Children
Benefit to Children: Median Values
$ Millions (Inflation-Adjusted)
1.78
0.97
1.28
0.86
15-Year Term
No CLAT: $50K/Year
20-Year Term
CLAT: $100K/Year
Assumed to be “zeroed-out” non-grantor CLATs based on the February 2012 Section 7520 rate of 1.4% with level
annuity payments of $100,000. CLAT funding amounts for 15- and 20-year trust terms are $1,344,531 and
$1,733,908, respectively. Wealth to children under the “No CLAT” scenario assumes that funds that would otherwise
fund a CLAT for the term specified are held in the donor’s personal account and used to fund annual gifts to charity. The
amount remaining after annual gifts to charity is subjected to an estate tax rate of 35%. Funds in the personal account are
assumed to be invested in 60% global equities and 40% municipal bonds. Funds in the CLAT are assumed to be invested
in 100% global equities. Data do not represent past performance and are not a promise of actual future results or a range of
future results. Based on Bernstein estimates of the range of returns for the applicable capital markets over the periods
analyzed. See Notes on Wealth Forecasting System on page 5 for further details.
Source: AllianceBernstein
As Display 6 illustrates, children receive
more money when $100,000 per year
has been donated to charity via a CLAT
(the dark green bars) than if the parents
directly donated $50,000 per year to
charity (the light green bars).
4
Other Strategies
While CLATs currently represent a
remarkable opportunity for donors,
multigenerational families, and charities,
they are not the only philanthropic
A Strategy for Capital Campaigns: Adopt the Donor’s Point of View
strategy worth considering. Direct
lifetime gifts of cash and appreciated
assets, testamentary gifts, private
foundations, donor advised funds,
charitable remainder trusts, pooled
income funds, and IRAs with charitable
beneficiaries are among the other
possibilities. While not reflected in this
paper, Bernstein can offer research-based
analytical advice to determine which
single strategy or combination of
strategies can best achieve the donor’s
wealth-transfer and philanthropic goals.
Strengthening Donor Confidence
While there are many good strategies to
deploy in a capital campaign, one of the
most effective today is to see things from
the donor’s point of view and put the
charitable statement into the context of
the donor’s overall financial plan. Donors
who feel their core capital is secure will
be able to take action with greater
confidence. And donors who are shown
the benefits of a CLAT will be grateful to
learn there is a way to benefit their
children and their chosen philanthropic
cause at the same time. n
Notes on Wealth Forecasting System
The Bernstein Wealth Forecasting SystemSM (WFS) is designed to assist investors in making a range of key decisions, including setting
their long-term allocation of financial assets. The WFS consists of a four-step process: (1) Client Profile Input: the client’s asset
allocation, income, expenses, cash withdrawals, tax rate, risk-tolerance goals, and other factors; (2) Client Scenarios: in effect,
questions the client would like our guidance on, which may touch on issues such as which vehicles are best for intergenerational and
philanthropic giving, what his/her cash-flow stream is likely to be, whether his/her portfolio can beat inflation long term, when to
retire, and how different asset allocations might impact his/her long-term security; (3) The Capital Markets Engine: our proprietary
model that uses our research and historical data to create a vast range of market returns, taking into account the linkages within and
among the capital markets (not Bernstein portfolios), as well as their unpredictability; and (4) A Probability Distribution of Outcomes:
based on the assets invested pursuant to the stated asset allocation, 90% of the estimated returns and asset values the client could
expect to experience, represented within a range established by the 5th and 95th percentiles of probability. However, outcomes
outside this range are expected to occur 10% of the time; thus, the range does not establish the boundaries for all outcomes.
Further, we often focus on the 10th, 50th, and 90th percentiles to represent the upside, median, and downside cases. Asset-class
projections used in this paper are derived from the following: US value stocks are represented by the S&P/Barra Value Index, with an
assumed 50-year compounding rate of 9.9%, based on simulations with initial market conditions as of March 31, 2009; US growth
stocks by the S&P/Barra Growth Index (compounding rate of 9.5%); developed international stocks by the Morgan Stanley Capital
International (MSCI) EAFE Index of major markets in Europe, Australasia, and the Far East, with countries weighted by market
capitalization and currency positions unhedged (compounding rate of 10.5%); emerging markets stocks by the MSCI Emerging
Markets Index (compounding rate of 8.3%); municipal bonds by diversified AA-rated securities with seven-year maturities (compounding rate of 3.8%); taxable bonds by diversified securities with seven-year maturities (compounding rate of 5.0%); and inflation
by the Consumer Price Index (compounding rate of 2.5%). Expected market returns on bonds are derived taking into account yield
and other criteria. An important assumption is that stocks will, over time, outperform long-term bonds by a reasonable amount,
although this is by no means a certainty. Moreover, actual future results may not be consonant with Bernstein’s estimates of the
range of market returns, as these returns are subject to a variety of economic, market, and other variables. Accordingly, this analysis
should not be construed as a promise of actual future results, the actual range of future results, or the actual probability that these
results will be realized. n
5
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Global Wealth Management
© 2012 AllianceBernstein L.P.
The information contained herein reflects the views of AllianceBernstein L.P. or its affiliates and sources it believes are reliable as of the date of this publication.
AllianceBernstein L.P. makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast, or opinion in this
material will be realized. Past performance does not guarantee future results. The views expressed herein may change at any time after the date of this publication. This
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