|
by Barlow T. Mann
 Recently, a number of studies have been released concerning
the potential impact on charitable giving resulting from the impending estate tax cuts and repeal. How
will your planned giving program be affected?
Over the past several years, reports had predicted reductions of between 12% and 37% in gifts from
estates, depending on economic assumptions. Based on the most recent Giving USA estimate of $21.6
billion in charitable bequests for 2003, this shortfall could amount to between $2.6 and $8.0 billion in lost
gift revenue.
CBO predicts reduction
Two new studies from the Congressional Budget Office provide updated predictions that are likely to
cause spirited debates among those interested in charitable gift planning. One report examines the overall
impact of the pending changes on charitable giving. That report, The Estate Tax and Charitable
Giving, concluded that the repeal of the estate tax would lead to a 6% to 12% reduction in total charitable giving. This could
result in a $12 to $24 billion reduction in gifts from individuals and estates, based on the latest Giving USA
figures. The report predicts a much smaller impact if the estate tax exemption equivalent were to be frozen at the
$2 to $3.5 million level. The effect of that more limited increase in estate tax exemption was predicted to cause
less than a 3% reduction in overall charitable giving.
The second study released by the Congressional Budget Office, Charitable Bequests and the Repeal
of the Estate Tax, examines previous predictions of a very broad potential range in the decline of charitable
bequests. The paper concludes that, with some adjustments to the methodologies used, the earlier reports
were actually much closer in their conclusions. The new
study concluded that the reductions were more likely to fall within a range of 20% to 30%. Again, using the
latest Giving USA figures, this would put the potential reduction in bequests in the range of $4.3 to $6.5 billion.
Committee report suggests upswing
Meanwhile the Joint Economic Committee of Congress reports that charitable bequests reached a
record high following the initial reductions in estate taxes. Their analysis of the data found that charitable
bequests actually increased 25% over the past five years in inflation-adjusted dollars. This trend line
would appear to contradict the position of the CBO’s reports.
Effect of the Economic Recovery Act
The conflict between these positions is not one that is likely to be resolved anytime soon. It may be instructive,
however, to examine the general trend line of charitable bequests in the decades since the enactment of
the Economic Recovery Act of 1981. This law unified gift and estate taxes, phased in the original $600,000
exemption equivalent, and provided for an unlimited marital deduction. The net effect of these changes
was to exempt 96% of estates from even having to file an estate tax return. At the time there
were dire predictions about the possible impact of these changes on future charitable gifts from
estates. Even so, charitable bequests generally continued to grow over the period examined in
the chart below.
During this period the largest estates continued to be taxable, and many of them also
enjoyed the benefit of a charitable deduction. However, it should be noted that the charitable
deduction only reduces the cost of the charitable gift. Unlike a tax credit, which
would offset the tax levy dollar for dollar, a deduction only “saves” the amount of the
tax. Thus family or other heirs will receive more if there were no charitable gift at all.
For example, this year the highest estate tax is 48% and therefore the after-tax cost
of the gift is 52%. Thus a $1 million charitable bequest would still deprive heirs of
$520,000.
The overall effect
In theory, the elimination of the estate tax may leave more for both the decedent’s
non-charitable and charitable beneficiaries.
Think of it this way: If you and your sibling were splitting a pie as an afternoon
snack, your pieces would be larger than if you waited for your “Uncle Sam” from
Washington to drop by and take a piece.
Most professionals would agree that tax incentives encourage certain activities.
While credits may be better than deductions, all tax benefits have a role in influencing
the behavior of individuals. There can be little doubt that some charitable bequests
will be affected by a reduction or a repeal of the estate tax.
It is also clear that more assets will be available as the estate tax is reduced or eliminated,
which in turn will leave larger slices of pie for both charitable and non-charitable
beneficiaries.
In the final analysis, one must determine if the net effect of these contradictions will
result in reductions or slower growth in charitable giving. If the overall economic pie continues
to grow, the charitable slice will grow. If the economy suffers a sustained setback,
people will continue to give but they will have less to give.
Astute gift planners will also note that even a 20% drop in charitable bequests would
only put the annual dollar volume back to the 2001 level. As tax incentives are reduced or
eliminated, it may be wise to focus on other donor motivations and seek to maintain relationships
with those older individuals who believe in your organization and the work that it does.
|
