Estate and Gift Taxes

Time to worry about tax law changes yet?

blog pickProbably not.  It doesn’t seem that the President and Congress are about to do anything together.

Ok, but what if all of the Republicans actually get in line (or a few Democrats defect…like that’s going to happen!!)?

Any problems with the most recent tax proposal for non-profits?

Here is a quick overview of potential issues that might impact nonprofits:

  • Standard deduction would be increased to $12,000 for individual filers and $24,000 for married couples – I can tell you right now that this does not hurt charities whatsoever – maybe even helps.  All it means is that middle and lower middle class America have less incentive to itemize but that sector is not likely to reduce charitable giving over a few tax benefits or not.
  • Personal exemptions and many itemized deductions would be eliminated – the income tax deduction won’t be touched directly so you actually might find upper middle class and higher Americans looking for more deductions (i.e. charitable deduction or maybe new fangled schemes for deductions).  Probably a plus for nonprofits.
  • Estate tax, which now only applies to estates of more than $5.5 million per decedent (or $11 million per couple) would be entirely repealed – oh boy, it’s not happening.  I’ll believe it when I see it.  George Bush Jr. had the power and did “repeal” the estate tax but was it really a repeal?  Go ahead and mess around with the estate tax again – all good news for consultants and attorneys. Probably not an impact on nonprofits but we will have to wait and see what they really are doing.

There is other stuff in it – the rest of which doesn’t yet rise to be addressed in this blog – here is a link if you want to read more: https://www.forbes.com/sites/janetnovack/2017/09/29/trump-plan-delivers-massive-tax-cuts-to-the-1-and-sharp-kick-to-upper-middle-class/#2f10cd861099

If you have ever seen my presentations, you would know that I subscribe to the 2% rule.  Americans in general give away 2% of their disposable income/wealth each year, roughly equal to 2% of the economy/GDP (see Giving USA for more on those numbers).  Since these percentages are very consistent, year in, year out, regardless of tax law changes, you have to believe that if anything  happens, it is not likely to impact charitable giving (unless it increases or decreases Americans’ disposable wealth or the overall economy). Even the so-called estate tax repeal doesn’t frighten me, and will probably be replaced with something confusing that I’ll be speaking and writing about it for years.

 

Pick your poison – Trump or Ryan tax proposals

Image result for trump ryan tax plan

I hate jumping into tax policy debates too early – Trump isn’t President yet and we really have no idea how things will shake out with him and Congress, or whether Democrats will somehow block things (hard to see that as they are not in majority!).

But, a big but….  I just took a look at a good article on CNN/Money (looks pretty nonpartisan to me) comparing Trump’s tax reform ideas with Paul Ryan and House’s – pretty fascinating and a little scary for nonprofits.

I point you to one huge impact area for nonprofits – here is the direct quote from the article:

Kill most itemized deductions

The House plan would eliminate all itemized deductions except those for mortgage interest and charitable contributions.

Trump’s plan, by contrast, keeps itemized deductions, but caps their total value at $100,000 for singles or $200,000 for joint filers, a more costly proposal.

Wow. Read that carefully.  The House plan would be AWESOME for nonprofits! Charitable deduction left along with mortgage interest!!!  No other deductions!

But, then read the second paragraph carefully (Trump’s idea): ouch!!  Capping deductions? What a DISASTER that would be for nonprofits. Remember: the rule of thumb is 80% of charitable funds come from 20% of the donors (or something like that).   Maybe this would be good for planned giving (sorry nonprofits, I know you don’t want to exchange today’s $ for tomorrow’s planned gifts)?

Here is another quote from the article that deserves some attention:

Cut investment income taxes

Today, individuals pay up to 20% on their long-term capital gains and dividends. And their interest is taxed at ordinary income rates — so, up to 39.6%.

House Republicans want to change that. Under their plan investors would deduct half of their gains, dividends and interest. That effectively reduces the top rate on that income to either 6%, 12.5% or 16.5%, depending on one’s tax bracket.

Trump would largely leave the current investment income tax rates in place.

Cutting capital gains taxes is not good for planned giving, plain and simple.  That extra incentive – especially when it was at 20% or more in the 1990s – fueled planned gifts like CRTs and CGAs.  The rates have been low since 2001 and both types are on the downslide.

I’ll take Trump on this one!

Lastly, what about the estate tax?

Kill taxes Republicans rail against

House Republicans want to repeal the estate tax, the Alternative Minimum Tax and key Obamacare taxes.

Trump is on board with all three repeals, but his plan would tax people’s capital gains above a certain amount when they die.

I’m fine getting rid of the AMT and Obamacare. Not fine getting rid of the estate tax.  It is the easiest tax to avoid.  If it affects you, you are forced to think about whether you want to leave a charitable legacy (and still leave your heirs fabulously wealthy) or a legacy of a large payment to the IRS after death.  The incentive is still important to move people in the right direction.

If you are political junky like me – on tax and other issues – you have to be waiting anxiously for this inauguration to finally be over.

Number of Estate Tax Payers Set to Jump by 1,580% in 2013

Slowly, people and the media are picking up on the impending estate tax situation (see these posts https://theplannedgivingblog.wordpress.com/tag/2013-taxes/ for the details).

The latest IRS estimates on numbers of taxable estates is as follows:

  • 2012 – 3,300 estimated estates paying any estate tax
  • 2013 – 52,500 estimated estates paying any estate tax

That is a jump by 15.8 times or 1,580%.  Seems like a lot to me.

Interestingly, individuals don’t seem to be taking advantage of 2012’s very favorable estate and gift tax laws.  See this article:  http://www.businessweek.com/news/2012-07-13/rich-passing-up-10-million-opportunity-to-gift-tax-free.

Very interesting phenomena.  Right now, there is very clear indication that individuals potentially facing estate taxes should do some sophisticated estate planning today – gift up to $10 million to children or even grandchildren.  Take advantage while the law lasts!  But, no, people are just not acting on it.

Maybe everyone assumes the law will get fixed – which is very likely.  But, not before we have at least a few months of limbo wondering if the 2001 law of $1 million lifetime exemption/55% federal estate tax rate will snare some unsuspecting tax payers.  Just like the 2010 estate tax repeal year where several billionaires just happened to pass away and avoid billions upon billions of estate taxes, the opposite could happen to average Joe’s who scrimped and saved their entire lives and might end up paying well more than their fair share.  It is like musical chairs – it all depends on where you are when the music stops.

For nonprofits, my advice stays the same: start planning seminars on estate planning for the fall!  You never know when people are going to adjust their estates and this fall we may see a rash of last second estate planning to avoid what it coming.  Why not get a fresh message about including your nonprofit in one’s estate plans in front of your prospects just as they might be changing their plans?

2012 Income/Estate/Gift Tax Update

Wondering about the state of the estate taxes and other tax brackets in 2012 (compared to 2013 if Congress does nothing this year to prevent this from happening)?  Take a look at the following chart:

U.S. Taxes 2012 v. 2013

2012 Top Tax Brackets

2013 Top Tax Brackets

Income Tax

35%

39.6%

Estate Tax

35%

55%

Capital Gains Tax

15%

20%

Dividends

15%

39.6%

Generation Skipping Tax

35%

55%

 

Exemptions

2012 Exemptions

2013 Exemptions

Lifetime Estate Tax Exemption

$5.12 million

$1 million

Gift Tax Exemption

$5.12 million

$1 million

Generation Skipping Tax Exemption

$5.12 million

$1.3 million

What should be jumping out at you upon seeing this chart?

Firstly, barring action by Congress, many people need to be addressing their estate plans this year.  This is a golden opportunity for planned giving fundraisers to encourage inclusion in wills and other estate plans knowing that this is a year that people should be making changes.

Secondly, individuals potentially facing estate taxes should be considering significant gifting to heirs this year to take advantage of the $5.12 federal estate/gift tax exemption, as well as possibly using the generation skipping tax exemption this year.  For planned giving fundraisers, the 2012 gifting options might open opportunities for gifts like lead trusts.

There will definitely be changes to all of the numbers in the above chart either before the end of 2012 or sometime in 2013.  In the meantime, anyone concerned about estate taxes will still have to take action, just in case.

My advice to the planned giving world is to educate your donors and prospects on the estate planning flux were are currently facing, and keep pushing the bequest and other planned gift messages more than ever.  How often to people change their estate plans?  Usually  not often…except maybe for this year or next.