A method for determining, in today’s dollars, what a planned gift will accomplish when received and used for its intended charitable purpose.
To view the entire Valuation Standards for Charitable Planned Gifts in PDF format, click here.
What are the Valuation Standards for Charitable Planned Gifts and why are they needed?
Valuation is the process of determining, in today’s dollars, what a planned gift will accomplish when received and used for its intended charitable purpose. Valuation does not seek to provide a comparison between an outright gift and a deferred gift. All things being equal, the outright gift is always more valuable to the charity. But if an equivalent outright gift isn't an option for the donor, then it is helpful to both the donor and the charity to consider the relative value (i.e., purchasing power) of the planned gift. Valuation is an essential component in helping donors and charities understand how to maximize the impact of charitable planned gifts.
Charitable organizations have had varying levels of guidance in accounting for planned gifts (Financial Accounting Standards Board procedures), determining the charitable tax deduction for planned gifts (US Treasury regulations) and counting planned gifts in annual and campaign reporting (PPP's Guidelines for Reporting and Counting Charitable Gifts).
Jeff Comfort, chair of the task force for valuing planned gifts, noted, “These methodologies are valid and useful for their intended purposes. However, none are intended to estimate the ultimate value of a planned gift to the charity that will receive it. In many cases, the accepted methods for accounting, counting, and determining the charitable deduction substantially underestimate the value of planned gifts. The valuation standards help charitable organizations and donors understand the value of a planned gift in terms of its present purchasing power. That present value is reached by considering real-world data, including the standards of the Prudent Investor Rule and historical indices of investment performance and inflation."
Valuation data can be used by charitable organizations to:
Evaluate costs and benefits of planned gift fundraising.
Determine financial effectiveness of an organization’s current investment in gift planning.
Allocate appropriate resources to a gift planning program.
Set planned gift fundraising expectations within a comprehensive fundraising program or campaign.
Assess the effect of certain variables (e.g., term of the gift, investment strategy) on the ultimate value of the gift to the organization.
Because valuation is based upon information that may be unique to each charity, the valuation standards are not generally intended to be used for comparing one organization’s fundraising performance to that of another organization. (Comparison might be possible if a group of organizations agree to use the same default values for that purpose.)
How are planned gifts valued?
The Valuation Standards for Charitable Planned Gifts use mathematical formulas to arrive at the present value of a planned gift—its purchasing power in current dollars. The process involves two steps:
Payout rates, donor life expectancy or term of the gift and assumed investment returns are used to determine the value of the gift at its projected termination.
The total future value is discounted backward to the present using a discount rate that is based on expected cost rise rates.
There are four variables that must be factored into the valuation process: term of the gift (often related to the donor’s life expectancy), investment return, expenses, payout and cost-rise rate. For organizations that have not maintained their own data on investment performance and expenses, the Partnership provides default values based on historical indices.
How are revocable gifts valued?
Existing standards for counting or accounting for planned gifts may not include revocable gifts. However, these gifts—bequest intentions, charitable remainder trusts with revocable remainder interests, retirement account designations, etc.—are a significant component of most gift planning programs. Excluding these commitments from program evaluation significantly understates the contribution of the program to the charitable organization. At the same time, the Partnership urges that any report of these gift values include a full disclosure of the revocable nature of such commitments.
In general, revocable gifts are valued in light of the probability of receipt. The present value of the gift is further discounted by a probability factor, which is based on what is known about the gift and donor. If the donor has a close relationship to the organization, the amount of the gift is specific, there is a legally enforceable pledge and the estimated value of the estate is 20 times or more than the intended gift amount, then the probability of receiving the gift might be set at 95%. If the donor has no gift history or documented relationship with the organization, a life expectancy of more than 30 years and it is impossible to estimate the value of the estate, then the probability of receiving the gift might be as little as 5%.
Organizations with well-established planned giving programs may elect to calculate their own probability factors through careful analysis of the facts of each gift where larger commitments are involved. Organization-specific probability factors might also be based on a review of past experience, comparing previously known expectancies to actual receipts of specific bequests over time. Organizations with less planned giving history may choose to base probability factors on a model provided by the Partnership.
Who was responsible for developing the Valuation Standards for Charitable Planned Gifts?
A task force of twenty gift planners from all types of charitable organizations and the various financial and legal advisor professions developed the standards over a three-year period. The standards have been extensively reviewed and approved by the Partnership Board of Directors. Comments were solicited from Partnership members and the development community at large, and key areas of the standards were clarified in response to these comments.