As summer turns to fall, many organizations focus attention on efforts aimed at maximizing gift income for the remainder of the calendar year. Lower tax rates in coming years and other factors may combine to make the fall of 2001 an especially attractive time for donors to complete charitable gifts.

Just over the horizon, however, 2002 promises to be a very important year for planned and major gift development efforts. Key provisions of the 2001 tax act will begin to come into play then, including reduced income taxes and the first “installment” in the scheduled reduction and/or elimination of gift and estate taxes.

Revisiting formulas

Under the law in effect in 2001, for instance, a person may give up to $675,000 to any other person during lifetime or at death free of gift or estate tax. Beginning January 1, 2002, this amount is scheduled to increase to $1 million. As a result, many donors will be examining their estate plans, especially in cases where amounts left to spouses and other family members are based on formulas that may no longer be applicable.

For example, suppose a person with an estate of $1,350,000 died this year and his or her will provided that the maximum amount that could pass tax-free at his or her death should be placed in what is usually known as a “family trust” that pays income to the surviving spouse for life, with the remaining assets in the estate distributed directly to the spouse. For maximum estate tax savings, the spouse would not have access to the underlying assets in the family trust. At the spouse’s death, the family would receive all of the assets in that trust tax free.

Using the above formula for asset distribution at death, under the law in effect for 2001 assets totaling $675,000 in value (the current unified credit equivalent amount) would pass to the family trust, and the remaining $675,000 to the spouse. At the spouse’s death, if he or she left the $675,000 to the surviving family members, under current law that amount would also pass tax free on account of the surviving spouse’s unified credit amount. The net effect would be to pass $1,350,000 tax free to the family by effectively utilizing each spouse’s unified credit amount. This formula, or one similar to it, has routinely been used for many years by estate planners in attempts to reduce or eliminate the impact of federal estate taxes.

Beginning January 1, 2002, the formula described above may no longer serve the best interest of all those concerned. Unless such a distribution formula in a will or trust that serves to distribute assets at death is changed, the effect beginning in 2002 would be to distribute $1 million to the family trust (as that is the new amount that could be passed tax free to anyone at death) with the remaining $350,000 passing to the spouse. For those who wish to maximize what could go to the spouse, while eliminating tax on the entire estate, this may not be the desired outcome.

Under the new law, next year the spouse could instead receive $1 million, as his or her exemption amount would presumably be sufficient to exclude that sum from taxation at death. The remaining $350,000 would then be placed in the trust for family members with income for life to the spouse. In other words, unless actions are taken to amend the formula, an outcome could easily occur that would not be what the decedent desired.

If all of this sounds complicated, it is. That is why persons with potentially taxable estates should not “try this at home.” Because of possible complications described above, along with many others that can come about as a result of the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, millions of Americans will be seeking help from professionals in reviewing their estate plans in coming months. Those most likely to re-examine their plans are not necessarily the wealthiest for whom the changes in estate taxation laws may have little immediate impact, but rather the much larger number of Americans who have found themselves gradually pushed into a taxable estate situation over the years—the very persons who were intended to receive relief first under the provisions of the tax act.

A rare opportunity

Because of the planning needs brought about as a result of this year’s tax act, there is a tremendous opportunity for America’s charitable community to provide helpful information to its constituency. Over the coming months, it will be vitally important to remind donors of the many benefits of charitable estate planning.

For those who believe they will no longer be subject to estate taxes, it is important to communicate the case for support that has always been a primary motivator of charitable bequests, whether or not taxes were a consideration.

As part of the estate review process, persons who have included charitable gifts as part of past plans will be asked by their attorney if they wish to retain such gifts as part of their plans, change the organizations and institutions that are named, and/or alter the amount and form of their bequests.

Take steps now to make certain that you are “top of mind” when your donors are asked to make these decisions. If it has been some time since you have been in communication with those who have previously notified you that they have included a bequest, this may be an excellent time to thank them again, and remind them of the many special planning opportunities available to them as a result of the new tax law.

Present other opportunities

In addition to bequests that may or may not result in estate tax savings in future years, point out that there are other gift plans available that result in current income tax savings, reduction or elimination of capital gains, generous payments for life, and other benefits from funds that would otherwise be used to fund a bequest. Encourage donors who can afford to do so to “accelerate” their bequests in ways that help enhance their financial security for the remainder of their lifetime and take advantage of definite tax benefits today compared to uncertain tax treatment of future estate gifts. With lower interest rates and less growth in the value of investments, increasingly high costs of medical care, and other increased living expenses for the elderly, amounts available for bequests from the residue of estates may not be as great in the future as in the present or the past. In addition to greater benefits for donors today, charitable beneficiaries may ultimately receive more if donors take steps now to complete charitable gifts during lifetime that might otherwise only take place at death, if at all.

Working with the wealthy?

For those whose estates surpass the new thresholds for gift and estate taxation, this fall can be a good time to present ways such persons can make charitable gifts, while taking maximum advantage of new tax benefits that are available to them under the terms of the new tax law.

No matter how wealthy an individual may be, he or she will be able to give away an additional $325,000 to anyone he or she chooses free of tax beginning January 1, 2002. As noted above, this is the difference between the $675,000 that can be given to others under the current law, and the $1 million amount that goes into effect next year. For a married couple, it will be possible to give away an additional $650,000 next year. Many will be advised to move quickly to take advantage of these amounts in case, as many predict, the law may be changed again in coming years.

Those who are working with the wealthy in 2002 may be surprised to hear from them that they may have difficulty funding large gifts because they have taken an advisor’s advice and have just transferred $650,000 to loved ones. But the new exemption amounts need not be competition for major gifts. They can be an opportunity to show committed donors how to give even more to loved ones under the new tax laws by combining their charitable gifts with the desire to benefit other heirs. See “Planning Matters” of the July 2001 issue of Give & Take for ways to multiply the new exemption amounts using charitable remainder trusts, lead trusts, and gift annuities.

It is not unusual for wealthy persons to decide how much they want their families and friends to inherit, and then leave the balance to charity. In many cases, the balance left is net of any tax due on the amounts left to non-charitable heirs. Encourage such persons to continue to make their plans in this way, as the planned elimination of the estate tax in 2010 will have no impact on what their heirs receive. The net result will be more for charitable use if no taxes are due on the bequests to other heirs.

A time for action

This fall will require careful balancing of priorities, especially for those development executives with multiple responsibilities. While encouraging donors to give all they can this fall when tax rates (and savings from deductions) are higher than next year, it is also important to begin to plant seeds that will bear fruit in the future when the results of estate plan changes become apparent in years to come.

Editor’s note: Click here to see the enclosed samples of publications designed to encourage gifts this fall for examples of how to blend messages encouraging timely gifts along with attention to changes brought about in recent tax legislation.

[ Back to School ]  [ Planning Matters ]   [ Donor Messages ]