Describing complex charitable giving instruments: Experimental tests of technical finance terms and tax benefits

• Published date: 01 June 2018
• Date: 01 June 2018
• DOI: http://doi.org/10.1002/nml.21302
• Author: Russell N. James

RESEARCH ARTICLE

Describing complex charitable giving instruments:

Experimental tests of technical finance terms and

tax benefits

Russell N. James III

Department of Personal Financial Planning, Texas

Tech University, Lubbock, Texas

Correspondence

Russell N. James III, Department of Personal

Financial Planning, Texas Tech University, 1301

Akron Ave., Box 41210, Lubbock, TX 79409-

1210.

Email: russell.james@ttu.edu

Planned giving, including charitable remainder trusts, char-

itable gift annuities, remainder interest deeds, donor

advised funds, and gifts of appreciated stocks and bonds,

can offer substantial benefits to donors and provide needed

support to charities. However, presenting complex charita-

ble planning options creates unique challenges. Past exper-

imental work demonstrates that social or emotional

concerns motivate charitable giving decisions, but that

financial or monetary reminders promote a market-

exchange mentality reducing both social concern and char-

itable donations. Consequently, some recommendeliminat-

ing references to tax benefits when introducing charitable

planning options. Yet, tax benefits may be a motivational

and socially acceptable form of donor benefit because they

cost the charity nothing. A series of experiments measuring

interest in pursuing various planned giving arrangements

demonstrates that although using technical financial

terms—including even the technically correct name of the

instrument—does reduce interest, referencing tax benefits

increases interest. Gratuitous technical finance references

may engender a market-exchange mindset and thereby

reduce charitable interest. However, a simple description

of donor tax benefits—a socially acceptable benefit also

relevant for a market-exchange mindset—can still motivate

charitable giving. The experimental results suggest that

when initially describing complex charitable options, prac-

titioners should avoid technical financial terminology, but

should mention, and even lead with, tax benefits.

KEYWORDS

charitable giving, financial planning, fundraising,

planned giving, philanthropy

Received: 16 October 2017 Revised: 3 January 2018 Accepted: 9 January 2018

DOI: 10.1002/nml.21302

Nonprofit Management and Leadership. 2018;28:437–452.wileyonlinelibrary.com/journal/nml © 2018 Wiley Periodicals, Inc. 437

1|INTRODUCTION

In the United States, complex charitable giving instruments can provide a range of benefits to

donors including capital gains tax avoidance, increased income, tax-free growth, and dramatic chari-

table tax deductions (Paulson & Owens, 2000; Yeoman, 2014). Such instruments also create sub-

stantial benefit for charitable organizations. In 2012, charitable remainder trusts and pooled income

funds distributed $4.3 billion to charities (Internal Revenue Service, 2017a). In the same year, $86.9

billion in total assets were held in charitable remainder unitrusts, $6.5 billion in charitable remainder

annuity trusts, $24.1 billion in charitable lead trusts, and $1.4 billion in pooled income funds

(Internal Revenue Service, 2017b). Separately, charitable gift annuities in the United States exceed

$15 billion (Clontz, 2010). Gifts of stock, the largest type of noncash gifts, accounted for over $16

billion in tax-deductible charitable contributions in 2012 (Liddell & Wilson, 2015). Donor advised

funds are a rapidly growing giving vehicle (e.g., annual contributions to such funds grew from $10

billion in 2007 to more than $17 billion in 2013), accounting for more than 7% of all charitable giv-

ing in the United States, and holding almost $54 billion in assets (Colinvaux, 2015).

Successfully presenting such complex charitable giving alternatives may be uniquely challenging

for advisors and fundraisers because of the sometimes-unexpected consequences of emphasizing

money or finance in a charitable context. The following reviews research detailing the problems of

such a financial or monetary emphasis as well as potential solutions or exceptions to these difficul-

ties. Next, a series of experiments explores the consequences of various finance-oriented phrasing

choices when describing different complex charitable giving instruments. Finally, a discussion of

the results reviews theoretical implications and practice suggestions in light of the new results and

past research findings.

2|LITERATURE REVIEW

Previous experimental research has identified potentially anti-philanthropic consequences on dona-

tions resulting from a monetary or financial emphasis. One explanation for this outcome proposes

that charitable decisions are not the result of a simple unitary decision-making process but rather are

the outcome of the interaction of more than one perspective or mindset. In this context, a social/

emotional mindset emphasizes cooperation and encourages sharing, but a financial/monetary

mindset—potentially triggered by financial/monetary reminders or terminology—emphasizes market

values and discourages giving.

2.1 |Money problems: A dual-self model

Several authors in economics, psychology, and philosophy have advanced the idea that decisions

are the outcome of an interaction between two mindsets, rather than a simple, unified, calculation

process. In his 1758 book The Theory of Moral Sentiments, Adam Smith (2010) presented such a

dual-self model, which pitted the passions against the impartial spectator. Other authors have pro-

posed various permutations of dual-self models using descriptive terms such as the planner and the

doer (Thaler & Shefrin, 1981), the affective system and the deliberative system (Loewenstein &

O’Donoghue, 2004), automatic processes and control processes (Benhabib & Bisin, 2005), system

1 and system 2 (Sanfey, Loewenstein, McClure, & Cohen, 2006), hot state and cold state (Van

Boven & Loewenstein, 2003), heart and mind (Shiv & Fedorikhin, 1999) or emotional and rational

(Pham, 2007). Although relatively recent, the emergence of neuroeconomics has led to a similar

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