Philanthropic Case Studies
Case Study
The financial situation for a local non-profit social service agency was not a bright one. The executive director had learned that the annual allocation of state-legislated funds was going to be cut significantly in the next fiscal year. Therefore, when the organization had the chance to apply for a sizeable foundation grant to make up the difference, the executive director, treasurer, and the agency's finance committee leapt at the opportunity, organizing a group meeting to begin the detailed application process in earnest.
What they learned, however, was disconcerting: the application process required full disclosure of the agency's financial condition, including the status of the agency's sizeable endowment. The finance committee, which was made up of board members, realized that the extent of their management of the endowment had been a biannual letter from the bank holding the funds. Although the finance committee included several savvy businessmen, they wisely concluded that none of the group members had the expertise to maximize the endowment's potential. They agreed to call upon the McKinley Carter team for help.
The Solution
During the first meeting with the agency's executive director, treasurer, and chair of the finance committee, the McKinley Carter advisor outlined the five-step process they would follow to design an investment policy statement and allocation model. The advisor proactively took the first step in their initial meeting by interviewing the three agency members to understand the agency's financial history and goals.
Once the advisor had collected all the necessary information, the investment specialists took the next step of conducting a detailed analysis. They prepared a comprehensive report, including asset allocation analyses and the risk/reward characteristics for the endowment.
After the report was completed, the third step of the process included the advisor scheduling another meeting with the organization's executive director, treasurer, and complete finance committee to review the details of the analysis. During this lengthy meeting, all questions were answered and the advisor confirmed, to the group's satisfaction, that they understood the agency's investment goals. When the meeting concluded, the advisor was able to use this information to prepare specific recommendations for the organization's approval, the fourth step.
At the next meeting, the advisor presented an investment strategy for the endowment. Longer-term investments with prudent risk would enable the principle to grow, while other measures would provide regular interest payments that would help defray agency operating costs. For the first time in many years, the endowment would be able to serve the agency as its original donors had intended. Upon accepting the advisor's recommendation, several finance committee members commented that they never would have had the time, much less the expertise, to prepare such a plan.
The complete report and recommendation were presented for a full vote at the next general board meeting. At the meeting, McKinley Carter suggested the organization of an investment sub-committee of the finance committee, made up of the board members who expressed an interest in, and knowledge of, investment strategies. Not only was the recommendation approved by the board, but the new investment committee was created to become the liaison with the professionals at McKinley Carter.
In the final step, McKinley Carter sent the agency quarterly statements of the holdings, allocation, and performance of the portfolio. An advisor was also available to consult with the agency's investment sub-committee annually to review their goals and how the endowment could work to help achieve them.
Meanwhile, the organization was awarded the foundation grant, and several successful fundraisers helped ease the immediate financial crisis. The encouraging endowment performance of the first report gave the emotional boost the agency needed to continue its mission in the community. Best of all, with a strong portfolio under the watchful direction of McKinley Carter, the organization was able to attract – and carefully invest – several new large donations to the endowment.
Case Study - Planned Endowment Growth
A college in western Pennsylvania was struggling to raise funds once the area steel industry began shutting down. Looking ahead, the school determined that its $8.3 million endowment would not be sufficient to continue its several programs of excellence. The college knew they needed to increase their endowment to support their financial goals and maintain the school's sterling academic reputation, but they weren't sure where to begin.
The Solution
First, the college under the leadership of an advisor now with McKinley Carter designed a plan which included a spending, savings, and gift policy. The plan disciplined spending of the school's principal fund, stimulated endowment savings, and encouraged new gift support. Then, with the leadership of the advisor, the school developed a planned giving initiative, with a proactive outreach to attract prospective donors.
At the inception of the plan, only three individuals had included the college in their financial plans. The advisor worked with the college staff and trustees to aggressively market charitable trusts and annuities to potential donors, developing a roadmap and becoming an integral part of the plan's execution. Through these diligent efforts, the school increased the number of individuals who now have the college in their estate plan, and have developed an endowment of $38 million with an expectancy pool of future gifts estimated at more than $20 million. The school is committed to keeping the endowment growing to ensure its long-term financial viability.
Case Study - Use of Life Insurance in Philanthropy
John and Jane, a married couple in their early seventies, have strong ties to their community. Two of their grandchildren had pursued higher education degrees, one as a lawyer, the other as a physician, so John and Jane were acutely aware of the cost of a professional education. The couple wanted to explore a number of philanthropic avenues to combine their community interests with their educational interests, but they weren't sure the best route to take.
The Solution
John and Jane sought the advice of an advisor now affiliated with McKinley Carter's Philanthropic Advisors unit to develop a comprehensive financial plan. After meeting with the couple, consulting a local community foundation, and working with the couple's insurance provider, the advisor recommended a joint-survivorship policy.
John and Jane purchased a policy with a death benefit value of $2 million, with an annual premium of $44,732. At the time they purchased the policy, John was 74 and Jane was 72. By naming the local community foundation as the owner and beneficiary, the premiums became a deductible contribution.
After ten years, the cash value of the policy is $544,000 including premiums and interest. To date, the donors have paid $500,000 for a benefit ultimately of $2 million. The results of their efforts will establish a fund to maintain the common areas of the community's historic cemetery and a scholarship fund for students entering law or medical school.
Case Study - Charitable Remainder Unitrust with Wealth Replacement
Ed and Agnes, ages 75 and 73, were the joint owners of Food Lion stock with a market value of $600,000. When they purchased the stock thirty years prior, the cost basis was $25,000. While the couple wanted to make a philanthropic gift by selling the stock, they faced a capital gains liability of 28%. In addition, because the Food Lion stock was part of their estate, they would face an estate tax as well. The Food Lion dividend was 1% or $4,275 annually.
The couple was looking for the best possible avenue for philanthropy while preserving their family wealth, but they weren't quite sure where to begin.
The Solution
The couple sought financial guidance from an advisor now affiliated with McKinley Carter. At the advisor's suggestion, Ed and Agnes transferred the Food Lion stock to create a charitable remainder unitrust with a college while removing it from their estate. They avoided the capital gains liability on the $575,000 in appreciation and improved their annual income from $4,275 to $30,000 based on a 5% rate of return from the unitrust. Then, the advisor helped them replace the $600,000 with a life insurance policy, which would pass to their children void of estate taxes. The increased income was sufficient to pay the insurance premium of $12,796.
Additionally, Ed and Agnes received a contribution deduction of $286,278. With an advisor's help, the couple was able to give back to the community while ensuring the financial well-being of their family by preserving their wealth and avoiding unnecessary estate taxes.
To learn more on how we may be of help, please contact us at 866-306-2400 or philanthropy@mc-ws.com.