If you’re planning on a couple of rich donors dying in the next few years, you might want to pencil in 2010 for keeping them alive if the goal is for them to avoid estate taxes.
There will be no estate tax that year unless Congress takes action but it will return in 2011. Of course, if the estate is more modest, say, less than the $2 million exemption, it would be exempt from the tax and a donor living longer might be more in your best interest.
Most observers see the estate tax as a good thing for charities. It provides additional revenues for the federal government, often a main revenue source for many nonprofits, and is an incentive for the wealthy to include charities in their estate planning. Some fear that charitable giving will plummet by several billion dollars a year with no estate tax.
"Repeal of the estate tax would cost about $1 trillion in federal tax revenues in the first 10 years, once the added interest on the federal debt is taken into account," said Patricia Read, senior vice president, public policy and government affairs for Independent Sector (IS), at a Senate Finance Committee (SFC) hearing last fall. Almost two-thirds of charitable bequests came from estates valued at more than $10 million in 2006, and three-quarters of bequests came from those valued at more than $5 million, she said.
According to the Congressional Budget Office (CBO), if the federal estate tax had not existed in 2000, charitable donations would have been reduced by $13 billion to $25 billion that year. If an estate tax exemption on the first $2 million to $3 million on an individual’s estate had been retained, it would have reduced charitable giving by $1 billion to $2 billion that year, Read said. The CBO study and others found that the estate tax "leads affluent individuals to donate more than they otherwise would, because such donations — whether made during the life or as bequests at death — sharply reduce estate tax liability."
Conrad Teitell, chairman of the Charitable Planning Group and principal at Stamford, Conn.-based Cummings & Lockwood, also testified before the committee in November. The Senate hasn’t been able to quite reach the 60 votes necessary for absolute repeal of the estate tax, he said, so everyone seems to recognize a compromise will be necessary.
No one can predict what is going to happen or when, however there could be a mood of compromise, depending on how things look this spring about who’s going to be the party in charge next year, he said. "The situation might be right for compromise and both sides might realize it’s time for a truce," said Teitell.
In follow-up materials he plans to send to the Finance Committee, Teitell suggests the committee report a bill by spring, and urge their colleagues in The House to pass a bill, to have a conference after April and legislation the president could sign by June.
"One thing is for sure, and that’s nothing’s for sure, but one thing seems quite clear is they’re not going to repeal the estate tax," Teitell said. "It may well be they wait until after the election, but you could say both parties will want to get this off the table and go on to other things."
Estates are exempt from tax up to $2 million ($4 million for couples) this year, with a rate of 45 percent above that level. The exemption increases to $3.5 million next year before disappearing altogether in 2010. The tax returns in 2011 at 55 percent with a $1-million exemption.
The Joint Committee on Taxation estimates that in 2009 there will be 9,600 estates subject to the estate tax, but almost 62,000 in 2011 after expiring in 2010. "I know for a fact that most of those 62,000 will not be billionaires," said Sen. Charles Grassley (R-Iowa), ranking member of the Senate Finance Committee. "I have consistently maintained that the death tax should be completely repealed, butÉI am willing to compromise."
The estate tax "needs serious reform. And I support repeal," said Senate Finance Chairman Max Baucus (D-Mont.). "For many smaller estates, the problem with the current estate tax is that the law keeps changing."
Speaking at the hearing, billionaire Warren Buffett proposed an exemption of $4 million, indexed for inflation, with a steeper progressive tax rate that taxes the wealthiest estates at a rate above the 45 percent level for 2009.
Adam Hughes, director of federal fiscal policy at OMB Watch, a Washington, D.C.-based nonprofit that monitors federal spending and policy, is unconvinced that estate tax reforms will be considered this year, much less acted upon.
"The debate over the estate tax has shifted significantly over the last two years or so to focus on more responsible and reasonable reform options," said Hughes. "These options seek to retain more revenue for important federal investments while instituting a fiscally responsible reform of the tax. Ideally, this shift will continue until Congress arrives at a permanent, revenue-neutral reform."
The American Bible Society (ABS) in New York City has $70 million in planned gifts in place with another $100 million during the next 10 years, a significant number in the next few years. "Estate gifts are really a huge issue because the largest charitable gifts simply come through estates," said Lewis von Herrmann, director of major and planned gifts, noting the multibillion-dollar gift received by The Salvation from McDonald’s heiress Joan Kroc. "Pretty much our largest gifts have always come through estates," he said.
Robin Phillips, director of planned giving at the American Jewish Committee (AJC) in New York City, said a bigger impact than the estate tax might be a dip in demographics, with fewer older people born during the period 80 years ago that could mean fewer bequests. "That’s a major concern," she said.
"Most who give by bequest are not necessarily hugely wealthy," Phillips said. "The only way they can afford to give might be by bequest, because they need their money during their lifetime." NPT