Many charities are investing time in fundraising efforts to increase planned gifts. Bequests are the most common form of planned giving. Bequests are the transfer of money that occurs upon the death of a donor. Often this is a donation of cash. It could be a specific amount or a percentage of the estate. However you may also receive securities, property or life insurance. Planned giving requires more planning by the donor and also requires more planning by the charity. Many donors who plan to leave money to a charity want it invested for a specific purpose that will have a significant impact. Examples could be scholarships, buildings, or an endowment. As the charity you will want to have something to offer prospective donors.
Because not all charities have a planned giving program you can see situations where an organizations receives an unexpected bequest and needs to make a decision on what to do with the funds. It can be tempting to use this as an unexpected windfall to deal with current budget shortfalls and bring the entire amount into operations for the year. However the danger in this approach is that while you may fix a short term budget problem it masks the underlying structural issues in the organization finances. You only delay some tough decisions that need to be made.
One option some organizations choose is to add any bequest to their endowment fund. An endowment fund is money that is invested where only the income earned on the funds is used for operations. The original capital amount invested is never touched as it’s intended to remain intact in perpetuity. In this case while none of the cash will go towards the current operation budget, the increase in the endowment fund will lead to increased transfers in future years.
Another option is to set up a separate fund for bequests you receive separate from the endowment fund. While the endowment fund requires you to maintain the capital, you could set up a fund which would give you more flexibility. The funds wouldn’t be totally used in the year they are received, but you could give yourself the ability to access the capital if necessary in future years.
One aspect to remember about bequests is that they are often unexpected. You will receive a notice and without having any idea the person was going to leave you money in their will. Even when you receive notice that your organization has been named as a beneficiary of funds it can be up to a year or more before you actually receive the funds. They may be small amounts but sometimes they can be large and these can have a significant impact on an organization depending on how you decide to treat these funds. Because of the unpredictability you don’t want to budget for bequest revenue.
The two key points to remember about bequests is not to budget for them in your annual operating budget since they are very unpredictable. The second point is to remember is that you need to decide how you are going to handle bequests. This is a discussion that should be done at the board level who should approve the policy for your organization.