One of the most important duties estate planners can carry out is ensuring their clients leave behind a legacy.
Many planners are more than willing to do the legwork for their clients, making certain the gifts they make are useful and appropriate. That's why so many planners have become conversant in the ways charities are evaluated — the many metrics out there that determine which organizations make the most of their donations and which ones squander them.
Perhaps the most popular measure of efficiency for a charity is its financial ratio. This makes perfect sense: donors want to be assured their money is being used well and that a high percentage of it is going into program activities rather than fundraising (which can mean lavish parties that only incidentally bring in money) or overhead (which can mean fat salaries for the executives and the board). There's a reason surveys have found that 36 percent of the public strongly agrees or mostly agrees with the statement that charities are wasteful.
See also: Leaving a phoenix-like legacy
But while those financial ratios are worth keeping an eye on, they're not the be-all and end-all. There are very good reasons why some charities' ratios aren't so impressive on first blush. Here are some caveats to keep in mind when looking at the numbers:
Expense ratio. One of the most-respected charity watchdogs out there, Charity Navigator, recently revamped its evaluation system to downplay expense ratios. Critics had claimed that by focusing on expense ratios, the system punished charities making long-term investments in their programs and facilities. Those costs often get wrapped up into administrative or overhead categories, when they're really in the long-term interests of serving the charity's beneficiaries. And a charity that pays for too little management and administration can run into inefficiencies all on its own.
In order for charities to grow, their first order of business is to increase donations. It's not usually possible for them to turn around and spend that extra money quickly on program activities — which means thriving charities can often score poorly when it comes to the expense ratio.
Charity Navigator has taken note of this. "By showing growth and stability, charities demonstrate greater fiscal responsibility, not less, for those are the charities that will be more capable of pursuing short- and long-term results for every dollar they receive from givers," the site says in its evaluation criteria.
The research group CharityWatch considers any figure above 60 percent spent on program activities to be "reasonable."
Fundraising ratio A charity's fundraising is subject to several factors that can throw off the ratio between the amount of money it spends on fundraising and the amount it actually takes in. For one thing, the organization has little control over when sizable estate donations might be coming in. The expenses the charity incurs this year on bringing in donations may not pay off until several years down the line.
