The Three Types of Donations, and How to Use Them

Many grassroots organizations want to buy their own building, open an endowment or raise more program money from major donors. Projects like these represent three different kinds of organizational needs, which should be matched to three different kinds of donations.

The Needs
Organizations have three needs: annual, capital and endowment.

Annual campaigns raise the money an organization needs every year. For most grassroots groups, raising this money consumes all their fundraising time.

From time to time, groups need something that they don’t need every year. Computers, rewiring, new phone systems and furniture are capital improvements that require money beyond the annual budget. For small capital needs, a group may add some money to its annual budget and raise it with an extra appeal, a proposal to a foundation or a request to a generous major donor. But when the capital improvement is something as costly as a building, the group must conduct a specific campaign to raise the money from a number of sources.

Organizations that think they will be needed forever, or at least into the projected future, will want to invest some of their money and use only the interest on the investment as part of their annual income. The principal that is invested is referred to as an endowment.

The Donations
Donors can provide three types of gifts: from income, from assets or from their estates.

Most people earn money every year from a job, investments, a pension or some combination of these. They donate some of this money. Generally, such donations from income provide for the annual needs of an organization. In other words, some of my income as a donor becomes some of your income as an organization.

Many people have investment assets in addition to their income, which come in various forms: stock, property, bonds, art, insurance policies and so on. A donor can give these assets to an organization, which generally uses them for capital. In other words, I give some of my savings, or my capital, to increase the capital of an organization.

Everyone eventually dies, and everything they owned in life, they own after death. Through a will, a trust or other estate-planning mechanism, donors can arrange for organizations to receive some or all of their estate. Generally these gifts are used for endowment. In other words, the last set of gifts I will give, which will form my legacy, will be used for the group(s) to exist forever.

Matching
Remembering about the three different kinds of gifts will help when planning for your three different kinds of needs. Obviously, unless restricted by the donor, organizations can use gifts of assets and estates for their annual needs. In the case of very small gifts or when donors regularly give stock as their annual gift, this may be appropriate. But generally, using assets and estate gifts for annual purposes is not prudent because these gifts will not recur.

Similarly, but probably less obvious, using gifts that come from a donor’s income for capital or endowment is also ill advised, for two reasons. An organization should not raid its annual income to fund capital costs (though many groups do), and people should be encouraged to give whatever they can afford to give from income every year, rather than for a one-time event such as a capital or endowment campaign. Nevertheless, if a person wishes to give a gift from income to a capital or endowment effort, an organization should, of course, accept, and thank the donor appropriately.

Only when a group fully understands what kind of fundraising it is undertaking should it begin the actual planning for a campaign. When contemplating a capital campaign, for example, many groups will say, “Our donors don’t earn that kind of money,” but this response disregards the fact that for gifts from assets, donors’ earnings are less important than their savings. I have seen successful capital campaigns where lead gifts came from older donors on fixed incomes who gave some highly appreciated stock or a piece of property. These donors get to deduct the fair market value of their gift and avoid capital gains tax, so they can make a greater gift than they would have otherwise been able to, at considerable tax savings.

When you plan your capital or endowment campaign, keep in mind that you are not asking donors to make extra gifts from their income, but, by giving assets, to go to a whole new level with your organization.

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