Uncertainty around the estate tax and other tax rates is causing many wealthy Americans to have second thoughts about how much to donate to charities.
In a recent Bank of America study on high net worth philanthropy, which was conducted by The Center on Philanthropy at Indiana University, 67% of wealthy households said they would somewhat or dramatically decrease their charitable contributions if there were no income tax deductions for their donations, up from 47% in 2007. If the estate tax were repealed, like it has been in 2010, 43% of wealthy households would somewhat or dramatically increase the amount they leave to charity in an estate plan, up from 36% in 2007. That is the opposite of what a 2004 study by the Congressional Budget Office projected. The CBO study anticipated that permanent repeal of the estate tax would slash donations to charity by up to 12%.
Americans may have the opportunity to find out whether the CBO study was right after all. In 2009 Congress allowed the estate tax to expire. Now the Democrats want to reinstate the tax at its 2009 level, with a $3.5 million exemption and a 45% tax rate, while Republicans want to repeal the tax permanently. If the CBO is correct that would be bad news for charities:
“There was more sensitivity in 2009 around tax policy,” said Claire Costello, national foundation executive for Bank of America Merrill Lynch, in a recent phone conversation. “But by and large tax policy is not a major driver of giving. The uncertainty is what makes donors sensitive.”
With the estate tax up in the air, Chris Grumm, CEO of the Women’s Funding Network, believes foundations and others who depend on philanthropy are nervous. “Of course it will impact some giving,” she said in a phone interview. “There is a point at which we have to figure out whether philanthropy is there because we believe we need to make certain changes in the community and philanthropy helps jump start that, or whether we give just because there’s a tax implication. I think both are very valid reasons.”
John Readey, a partner in the Bryan Cave law firm’s Kansas City office, said that in his experience the wealthiest individuals are driven more by a question of limiting the amount they want to leave to their families rather than trying to save estate tax. “Their goal is they want to leave a certain dollar amount to their children and grandchildren. Beyond that they like the idea of creating a family foundation in which the family members are often involved. They view their giving as somewhat coincidentally a tax benefit,” Readey said.
“The ground is moving in all sorts of places- from the estate tax to income tax to economic uncertainty and it raises a red flag,” said Stacey Haefele, CEO of HNW, Inc., a marketing firm focused exclusively on the high-net-worth sector.
One area where giving continued to increase, despite the overall downturn in donations, was in private foundations, donor-advised funds and charitable trusts, with over 16% of wealthy households giving to these vehicles in 2009. The average giving amount increased as well, jumping by 21% from $62,680 in 2007 to $75,867 in 2009.
Kimberly Wright-Violich, President of Schwab Charitable, said there are three reasons donor-advised funds fared well in 2009: Between 65% and 75% of contributions to Schwab’s donor-advised fund came in the form of appreciated securities, which was boosted by the stock market recovery in the last three quarters of 2009; a growing number of the founders of private foundations are converting to donor advised funds to reduce their cost and complexity; and the resilience of giving among those who still have jobs and want to help others.