by Robert F. Sharpe Jr.

Last month’s issue of Give & Take explored the first 40 years of Robert F. Sharpe & Company and our efforts to help develop more sophisticated programs aimed at encouraging current and deferred major gifts (visit www.sharpenet.com/gt for the December issue).

As we begin the new year, we would like to take this opportunity to share our views on the future of chari­table gift planning and the adaptations we believe may be necessary for organizations’ continued success in helping donors better plan their gifts.

Tax law changes

Income, gift, and estate tax law issues have long been important factors in the planning of charitable gifts, whether such gifts are completed in the near term or are structured to provide income or other benefits to the donor or the charitable recipient over time.

We believe that important tax law changes in 2003 and 2004 will increasingly change the ways in which tax planning and charitable giving interrelate.

For example, last year Congress acted to reduce the maximum tax on capital gains and dividends to 15%. The maximum income tax on most other types of income was lowered to 35%. This means, among other things, that charitable deductions will no longer yield quite as much in tax savings as in the past, and that wealthier donors and their advisors will also be less concerned about avoiding capital gains tax through outright donations of appreciated property.

On the other hand, planning gifts for maximum tax benefit will continue to be important. In light of changes in income and capital gains tax laws, efforts will shift to structuring gifts so that they provide the maximum possible amount of income that is taxed at the 15% rate. This will involve carefully choosing the right property to fund a trust, gift annuity, or other split-interest gift. In addition, recent tax law changes will also have a major impact on the way trust assets are invested.

In the case of a charitable remainder unitrust, for example, trust assets might be invested partly for growth and partly in stocks that pay dividends. As assets are sold and dividends collected to provide funds for payments to the income recipient, the bulk of the amount distributed will be taxed at a maximum rate of 15%. So, we see an emerging trend away from reliance on tax deductions to provide tax savings and toward planning for realization of income at lowest possible tax rates.

In other recent developments, beginning January 1 of this year, the amount exempt from estate tax rises to $1.5 million per person. Thus, with minimal planning a married couple can now pass up to $3 million at death free of estate tax. As is the case with changes in income and capital gains tax laws, this change in federal estate tax law is expected to have a significant impact on the way people incorporate gifts in their long-range estate and financial planning.

While the popular press has concentrated on the possible negative impact lower gift and estate taxes may have on bequests and other estate gifts, there may be a quite different outcome.

The vast majority of bequests in recent years have come from nontaxable estates. Based on NCPG surveys and other data, approximately 220,000 estates per year (8% of decedents) leave funds to charity. Contrast this with the fact that only approximately 17,000 estates claimed charitable tax deductions in the most recent year for which figures are available. Thus, some 92% of the estates that have included charitable provisions were exempt from federal estate tax.

It is important to note that noncharitable heirs will always receive more if no funds are directed to charitable use. But it is possible that heirs will now receive more than they would have if the same bequest had been placed under prior law. How is that pos­sible? Because the estate tax has now been effectively repealed for 99% or more of all Americans, there will be no tax on the noncharitable portion of their estates. This means that a donor can leave a charitable bequest in his or her will and the family can actually receive more than they would have if the donor had made the same bequest as recent­ly as 2001. Thus, there is no logical reason why a person who had included a charitable bequest under prior law would alter those plans because of estate tax repeal when that repeal will actu­ally result in more funds reaching loved ones, even after funding a charitable bequest.

Shift to lifetime gifts

What is becoming increasingly clear, how­ever, is that reduction and/or elimination of estate taxes will lead to increased interest in gift annuities and other gifts that feature immediate tax savings and favorably taxed income for life or another period of time. Take the case of a married couple that is planning a bequest in the range of $100,000 from an estate of $3 million that will no longer be subject to estate tax. Suppose they also have appreciated securities worth $100,000 that yield no income. A very attractive alternative would be to use the non-income-producing stock to fund a life income gift and receive an immediate income tax deduction equal to a significant percent­age of the value of the assets transferred, while enjoying increased income for life that will be received either tax free or will be taxed largely at lower rates applicable to capital gains and dividend income.

Another factor that bodes well for success in major gift planning in coming years is the fact that for the first time in many years, the estate tax and gift tax will diverge in terms of exemp­tion level. The exemption from the federal gift tax is not slated to rise above the 2003 level of $1 million per person. This threshold will remain even if the estate tax is eventually eliminated. See chart at left. For this reason, charitable lead trusts and other plans that result in charitable gifts while transferring assets to loved ones during life may become more popular than ever.

Fewer “death gifts”?

In addition to the impact of the tax law factors outlined above, the aging of the baby boomers can be expected to alter the gift planning landscape. The oldest of the baby boomers are now 58 years old. So, even though some 70 million Americans will pass age 65 over the next 20 years, the life expec­tancies of the boomers stretch out to between 25 and 41 years into the future.

For this reason, we foresee greater use of gift plans that will provide usable resources for charitable recipients during the donor’s lifetime. Term of years charitable trusts, life income gifts for parents, lead trusts, and chari­table remainder trusts with temporary assign­ment of income are just a few of the plans we predict will enjoy greater popularity. Traditional charitable remainder trusts for the donor’s lifetime and gift annuities will likely peak in importance before waning for a few years until the mass of baby boomers passes the age of 75.

Organizational changes

Many organizations and institutions are now adapting their efforts to encourage more effective gift planning in light of the factors out­lined above. They are placing greater emphasis on better ways to integrate planned and major gift development efforts. Smaller programs without clear historical lines of demarcation between “planned gifts” and “major gifts” appear to be progressing more rapidly in this process.

As mentioned in last month’s issue of Give & Take, the term “planned gift” has over the years become largely synonymous with gifts that take place at death. The term “major gifts,” on the other hand, has normally been applied to larger current gifts.

The most successful programs today, and in the future, will increasingly organize their development efforts around the fact that there will gradually be more overlap between programs that are designed to encourage larger outright gifts and planned giving programs that place more emphasis on gifts that are completed as part of the long-term estate and financial planning process.

In order to efficiently structure gifts from relatively young donors who have accumu­lated significant amounts of assets but who are not necessarily prepared to make large outright gifts, it will be necessary to facilitate much closer interaction between “planned” and “major” gift development efforts.

How this change is accomplished will vary according to the scope of an organization’s fund-raising efforts, the demographics of the donor constituency, and other factors. In some cases, it will simply mean that a person work­ing in a smaller shop who is responsible for all development activities will want to become more attuned to gift planning options other than cash or gifts of securities. In larger pro­grams with more division of labor, it may mean more cross-training and perhaps reassigning responsibility for working with some among the segment of older, wealthier donors.

Getting your share

Against the backdrop of tax law changes and demographic shifts, it is important to keep abreast of the unfolding of the greatest intergenerational transfer of wealth in his­tory. Reports from the Social Welfare Research Institute at Boston College indicate that previ­ously reported wealth transfer statistics will not be significantly affected by recent invest­ment market fluctuations. With the unprec­edented increase in programs designed to encourage planned gifts in recent years and more and more capital campaigns relying on deferred gifts to achieve ambitious goals, how­ever, there is no shortage of organizations and institutions that are expanding their gift plan­ning capabilities. That being the case, there is no reason why a rising tide can’t raise all ships. But it won’t raise those that remain in port, lashed to the dock, or those with their crew below deck!

There is a bright future indeed for those who have chosen to devote their energies to helping donors and prospective donors engage in the process of voluntarily devot­ing a portion of their accumulated assets to charitable use today and in the future. This is a noble activity and one that never fails to yield a variety of both material and intangi­ble rewards to donors, those who assist them as they plan, and their charitable interests.

Today we stand at a crossroads. Those who have come before us have laid the foun­dation for success. Those organizations that act decisively to seize the opportunities that are all around us will prosper in ways earlier generations could only imagine.

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