Wednesday, January 13, 2010

The Effect of No Federal Estate Tax on Charities

Interesting post from today's Wall Street Journal.


* January 13, 2010, 10:00 AM ET

The New Estate-Tax Math: Give to Charity or Your Children?

Before Jan. 1, the wealthy had a fairly basic choice when it came to their estates: they could leave the money to their families or give it to charity.

But it wasn’t really an equal choice. With the government taking a large chunk for the estate tax, the choice was to leave a portion to heirs after the IRS took its chunk, or leave the full pretax amount to charity. In other words, for each $1 of the estate, the wealthy could leave $1 to charity, or they could leave 55 cents for their heirs and 45 cents to the IRS (with various caveats for spouses, thresholds etc).

As of Jan. 1, however, there is no estate tax, at least for a year. So the wealthy now have a more equal choice: $1 for heirs, or $1 for charity. Guess which one they probably lean toward?

“I’d like to think we’re all altruistic,” Sanford J. Schlesinger of Schlesinger Gannon & Lazatera LLP, told Financial Planning. “But especially in a dreadful economy, repeal will have a devastating effect on charity.”

Adds Ben Harris of the Brookings Institution and Urban Brookings Tax Policy Center: “With repeal, the price of charitable giving is more expensive. This is a monumental change in the estate-tax rate. We’re not talking about going from a 45% estate tax to a 35% tax. We are talking about from 45% down to zero. Does this mean people won’t give to charity anymore? No. Of course they’ll give to charity; just less.”

Of course, this all assumes that philanthropy is driven in large part by tax incentives. Many wealthy folks say that is nonsense: that they are driven by the desire to make the world a better place.

But in a call last month in support of retaining the tax, mutual-fund pioneer Jack Bogle professed that tax considerations are a “huge incentive” for him to give money to charity, even though he also plans to leave money to his six children and 12 grandchildren.

“Virtually every well-to-do person sitting down with a lawyer to talk about their will gets into a conversation about whether he needs to do something for his church, his university, whatever,” Mr. Gates said. The estate tax, he said, “is a gigantic element for philanthropy in this country.”

How much do you think the estate tax changes will hurt philanthropy?