In 2022 $46bn was bequeathed to charities in the US. That number, 9% of total donations, represents the real dollar amount that the American people wanted to give prior to passing away, but didn’t due to uncertainty.
This isn’t a particularly surprising figure. We don’t know when we’re going to die, a bank balance nearing zero is a scary concept and there’s no downside to just giving it all away when you don’t need it anymore. Right?
Not quite. The next 30 years worth of bequests are sitting idle, quietly appreciating, on balance sheets across the world when they could be deployed at a much higher rate of social and financial compounding.
It would be disingenuous to suggest that $1.38tn ($46 bn x 30) is sitting there as dry powder at this very moment. Future bequests aren’t just held in liquid investments, they sit in residential property (home equity accounts for 27.8% of household wealth in the US) and expected future earnings, but If you account for these you get an estimated $544bn (although with some chunky error bars) that could be deployed far earlier.
Well, we might not be confident in knowing when an individual is likely to die, but we’re very good at knowing when most people are likely to die (the life insurance industry is based off it) and fractional reserve banking is fundamentally based on the model that we can take deposits, allocate a fraction and keep a reserve based on what is likely to be withdrawn.
Meshing both of these, we have all the components needed to create a mechanism that accepts and partially allocates early bequests. A system that takes funds earmarked for charitable causes (secured by priority in a future estate), retains a percentage of them for future withdrawals (in the case of financial insecurity), allocates the rest to charitable causes now and (optionally) securitises them to mitigate any risk of default.
Consumers have current accounts and savings accounts, this adds an “early bequest” account to the roster.
Since 2015 I’ve talked to a number of people about the concept of an early bequest account and questions typically fit three categories. Security, tax and incentives. Namely; what’s to stop bad actors from forcing allocations to charities that wouldn’t otherwise receive them, how do you treat tax on charitable donations that aren’t really donations and who is actually incentivised to implement an early bequest structure?
All of these are implementation details that are worth discussing.
The broad concept of an EBA (early bequest account) generally treats charitable donations as interchangeable, but are they? If enough donators of a given charity donate then subsequently withdraw more than can be recovered from their estates and the total deficit is greater than all other donations the charity receives from EBAs then the charity in question has received money it’s not entitled to. This isn’t a problem in aggregate, that’s why reserves are kept, but balancing the books for individual charities isn’t necessarily explicitly catered to. This isn’t likely to happen often (where it’s an organised and intentional act by donators it’s legally fraud) but it’s a valid scenario and it’s worth attempting to mitigate. Withdrawal limits (allowing a maximum amount per month to be withdrawn) and only allowing donations to well established charities helps minimise the risk but doesn’t fully solve the edge case. However, treating donations as only preferentially allocated does. Allowing consumers to generally donate heir EBA funds to specific charities, but occasionally balance the books of others, fully mitigates the threat.
What about tax?
Charitable donations have special tax provisions in most countries. How do you treat donations that are only provisionally given? Pensions have a similar model and provide an established solution. Deferred withdrawal means you pay tax when you draw the account down, not when it’s earned. If the money isn’t withdrawn in the future, you’ve received the correct tax treatment. If it is, you pay tax then.
Doesn’t that mean you should deposit as much as possible then draw it down when you’re retired and in a lower tax bracket? Yes, but the total amount deposited is a claim on an estate, when you die your illiquid assets cover the shortfall.
Let’s say you’re convinced. You see the benefits of EBAs for charities broadly, and your own tax planning, but who’s incentivised to expend the enormous effort to actually administer one? It’s risky creating new financial products and you need to lobby governments to create a sensible tax structure. Goodwill is rarely enough to overcome those barriers, but what about $544bn in additional AUM that fits into similar systems to pensions and savings accounts? That’s more in AUM than Nomura ($388 bn), BNY Melon ($409 bn) and Nationwide Building Society ($447 bn). It’s not possible to charge fees on all of it, only the reserve, but that’s not a small number.
It’s definitely not a small number when you consider that a $544bn estimate is just the US. This model isn’t US specific, it translates globally, and it unlocks capital at similar scales to that which is needed to end extreme poverty globally.
That might be a grand goal given the comparatively small percentage of charitable spend that goes towards international development, but it highlights the scale we can affect by using the dry powder that is waiting patiently within our current system.