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Fall 2000
Update: Tremendous Gift Opportunities
By Robert F. Sharpe,
Jr.
The fall months have always
been the time when a large percentage of gift income is received.
This is true for a number of reasons:
1. The final months of
the year are traditionally the “season of giving” when many
peoples’ thoughts turn to sharing with others.
2. Many individuals receive
work-related bonuses at the end of the year and they wait to
see how much they will have to give to others.
3. Those who own their
own businesses often do not know how they fared for the year
until the final months.
4. Investors often “balance”
their portfolios toward the end of the year and find that charitable
gifts can be used to offset taxes due on gains they may have
realized earlier in the year.
5. The deadline for making
tax deductible gifts is December 31, another reason many choose
to make gifts later in the year.
Year-end 2000 is shaping
up to be one of best ever for giving to America’s charitable community
as economic and other conditions are favorable in terms of all
of the factors listed above.
Mood of the country
In this election year there has been a tremendous amount of discussion
about unprecedented prosperity in America. History reveals that
while the philanthropic spirit in America is quite resilient,
Americans give more in times of broad-based prosperity.
Workers earning more
Reports indicate that once again the real wages of Americans
will rise more than inflation. After long periods of declines
in real wages, many donors are finding that their discretionary
income is steadily rising. Americans give about 2% of discretionary
income to charity so this is good news for charitable giving.
Market fluctuations
This year has seen a great
deal of fluctuation in investment markets. As we go to press,
the markets are once again hovering at or near the record levels
they reached in January. In the spring, however, during a period
of downturn, many individual investors sold stocks before profits
eroded further and in so doing generated significant amounts of
capital gain. This was also true of mutual fund managers, leaving
many investors with capital gains to report due to sales inside
funds, even though they did not receive the cash proceeds. Many
donors will find, therefore, that gifts of other appreciated securities
before the end of the year may be the best way to offset capital
gains that would otherwise give rise to tax liability next April.
In other cases, donors are
sitting on the sidelines with large amounts of cash and may decide
to use those funds to make gifts before the end of the year.
For these and other reasons,
market conditions may make charitable gifts especially attractive
to many donors this fall.
Tax climate is favorable
In an election year there is typically much talk of tax change—and
this year has been no exception. Both major candidates are promising
tax cuts as part of the benefits of projected budget surpluses
in coming years.
As the savings from charitable
and other tax deductions are greater when taxes are higher, lower
taxes in the future may result in slightly less savings as a result
of making charitable gifts. If properly informed, many donors
may decide to complete gifts this year in order to take advantage
of tax rates that are now higher than they may be in future years.
There has also been discussion
of reducing and/or eliminating the federal gift and estate tax
in coming years. While there has been much speculation on the
impact of estate tax reductions on charitable giving, consider
the following:
1. The vast majority of
bequests, gift annuities, and many other types of planned gifts
are made by persons who are not subject to estate taxes. Of
approximately 2.5 million persons who died in 1997, only 90,000,
or just under 4%, died with taxable estates. Of that group,
only 16%, or 15,000, made use of the charitable deduction. These
persons gave large amounts to charity, but indications are that
approximately 185,000 other persons left charitable bequests
with no estate tax benefits.
2. The minimum cost of
a charitable gift via estates to a family is now 45% per dollar
left to charity. In simple terms, if a person leaves $10 million
to charity, it now costs their heirs the approximately $4.5
million they would have had if the charitable bequest had not
been made and the $5.5 million in taxes had been paid. For persons
who are not now subject to estate taxes, the cost of making
a charitable bequest is 100% per dollar bequeathed, as their
heirs would have received their entire estate had charitable
interests not been included. It is clear, therefore, that many
people now make charitable bequests when the cost is 100% of
the amount donated to charity and there is no reason to believe
that wealthy people who give generously during their lifetime
will decide to give less through their estates when it will
cost their heirs even less than under today’s system.
Example: Mr. Donor
has amassed an estate of $10 million. His estate will pay taxes
at the rate of 55% of amounts over $3 million. As part of a capital
gift development effort, he made a commitment of $2.5 million
via his estate and a gift in this amount was announced. Mr. Donor
has two children, and he decided he wanted them to share the balance
of his estate amounting to approximately $1.7 million each under
current law. If the estate tax were repealed tomorrow, the children’s
share would increase to $3.75 million each, or more than twice
the inheritance that was originally anticipated when Mr. Donor
planned his bequest.
Note the approximate “cost”
of this gift to his family net of the combination of estate taxes
and the gift assuming various estate tax rates.
Upon learning of the proposed
repeal of estate taxes and the impact of that on his children’s
inheritance, he decided that he would rewrite his will in such
a way that the bequest would remain in his will following estate
tax repeal and actually be increased somewhat if estate taxes
are reduced, as he would then be able to “afford” to leave more
while his children would actually receive more...a classic “win-win”
situation.
3. If there are major
changes in estate taxes there will be tremendous opportunities
to emphasize the importance of charitable giving via estates.
Untold numbers of donors will review and possibly revise their
estate plans on the heels of estate tax changes. The older and
wealthier they are, the more quickly they can be expected to
make these changes. It will be imperative, therefore, that the
charitable community get its message out as quickly as possible
following any such changes.
4. Repeal of estate taxes
may lead to increased gifts during lifetime, both outright and
in the form of trusts, annuities, life estates, and other “split
interest” gifts. If there is no tax advantage to making gifts
at death, then many donors will decide to make the gifts while
they are alive and can realize income tax savings. For those
who are contemplating bequests, they may decide to fund gift
annuities, charitable trusts, and other gifts that allow them
to unlock income from appreciated assets while also enjoying
income and capital gains tax savings. Repeal of the estate tax
would also bring repeal of the gift tax, removing an obstacle
that currently blocks the completion of many charitable trusts,
gift annuities, and other plans that would otherwise be created
to provide income for loved ones other than a spouse before
making an ultimate distribution for charitable purposes.
Act now for maximum advantage
These are exciting
times for fundraisers. As always, those who assess their environment
and adapt accordingly will not only survive, they will prosper.
There are wonderful opportunities for those organizations and
institutions that serve needs in our society not met by the business
and government sector. Meeting those needs through voluntary transfers
of wealth has always set America apart from much of the rest of
the world. There are more funds available to be raised than ever
before. Show your donors the best ways to give those funds and
make 2000 your best year ever!
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