Tax Relief and Charities

As the dust settles over the unexpected, and somewhat shocking, estate and other tax law changes thrust upon us in December 2010, the nonprofit fundraising world now has figure out  what does it all mean for our development programs?

And, give credit to the New York Times for reaching out to some of the sages of fundraising and tax law (i.e. planned giving champions).  As reported by Jan Rosen in the  February 9th edition of the NY Times, there may be a bright side for charities to the tax law changes after all (see

While the article expressed several positive ideas from Robert Sharpe, Conrad Teitell, and other experts, and was a nice overview of planned giving,  I still wonder if the article really hit the most glaring points for nonprofits to take away from the Tax Relief Act.

Ironically, if  you hear Robert Sharpe in person, as I did this past week at the Philanthropic Planning Group of Greater New York, the messages were glaringly clear – which were somehow muffled in the staid Times piece.

In the blogosphere, we don’t have editors so we don’t need to try to make nice.  So, here are the blunt messages, based on Robert Sharpe’s unique ability to combine data, history and creative thinking.  (Mind you – I have heard Robert speak every year since 1998,  and always walk out with new and exciting ideas).

Does the phasing out and/or lessening of the Estate Tax negatively impact charitable bequests?

No.  Never did.  And, the data proves it.

As of the 2009 estate tax regime ($3.5 million exemption), 97% of deceased individuals choosing to leave charitable bequests in America had non-taxable estates.   In other words, 97% of decedents’ estates made charitable bequests even though they were not facing any estate tax.

Under the logic that the estate tax is the motivator for charitable bequests, why do we see an overwhelming percentage of estates with charitable bequests coming from non-taxable estates?

Granted, a good percentage of the total dollars reported by the IRS as charitable bequests does come from the tax eligible gross estates.  But, nothing in the Giving USA and IRS bequest data suggests that the lowering of the estate tax from 2001 to 2009 had any impact whatsoever on overall charitable bequest revenue.  The jury is still out to see how 2010 impacted charitable bequest dollars but read the next section closely.

Will no estate tax and/or higher personal exemptions reduce charitable bequests among the wealthy?

Thank  you Robert Sharpe for pointing our attention to Bank of America’s ongoing Study of High Net Wealth Philanthropy.  The attitudes of study participants (all high net wealth individuals likely to face estate taxes) from 2006 through 2010 all point to increases in the charitable portions of their estate plans as the estate tax burdens on their families decreased.

In other words, many higher net wealth parents generally determine appropriate bequest amounts for their children and heirs to inherit, and then see the remainder for charitable purposes.  Less taxes on the family, more money for charity (not the opposite).

Here is a chart from the Bank of America study that show the change in attitudes:  Slide on attitudes regarding estate tax repeal – page 48

Here is link to the full report:

IRA Charitable Rollover and the Pease Amendment postponed – opportunities abound!

As mentioned earlier, I have seen Robert Sharpe at least once a year, sometimes twice, since 1998 and I remember many of his talks.  I recall clearly that he was not a big proponent of the IRA rollover legislation around 7 years ago, when it was hovering on the verge of enactment  (but kept narrowly failing).

Today, he is declaring that major gift donors must be informed of this option – it is an easy win for fundraisers. A challenge though is that it is only extended through 2011 (not through 2012 like most of the rest of the Tax Relief).

What Mr. Sharpe pointed out was that most IRA dollars to charity came from higher grant amounts generally, most likely from your major gift prospects.  A PPP survey he quoted showed that IRA gifts over $25,000, which were 17% of the number IRA transfers, accounted for 73% of the funds transferred to nonprofits.  In other word, be in touch with your major gift donors on this!

Additionally, Congress extended the hiatus on the 3% Phaseout Rule (or Pease amendment) for both 2011 and 2012.  Why is this important and what does it have to do with IRA giving?

This is a little understood rule that reduces most itemized deductions by up to 3% once certain AGI limits are exceeded.  In other words, this is a backdoor tax on charitable giving and other typical deductions for the highest earners (starting to kick-in for AGIs around $160,000).  This rule was a reason why withdrawing from IRAs and other retirement accounts (without the IRA rollover) for charitable giving would actually cost donors money (increased AGI as a result of the withdrawal could subject donor to 3% reduction in charitable giving and other deductions ).  Never fun to pay taxes on charitable giving.

What Robert Sharpe so brilliantly pointed out is that the Tax Relief Act pushed off the application of this rule for 2 more years – opening up the possibility for anyone even over age 59 1/2 to withdraw funds from IRAs or other retirement accounts and then contribute those funds – without the negative tax consequence of losing some itemized deductions.  In theory, such a giving method should be a wash for the donor and no tax consequence (in 2011 and 2012). Warning: Consult your CPA before trying this at home!

My own commentary is that this option has always existed (yes, the 3% reduction rule was a clear cost to donors), but there is also a psychological barrier here.  Donors just don’t take to this option because increasing one’s AGI sounds like a problem.  Maybe it kicks in the AMT (I am not even sure on this – and if it does, it can’t be good for the donor)?  Maybe it affects your donors’ government benefits?  In any case, it takes a long conversation, lots of explaining, involving of CPAs, etc…  Too much complications for the typical donor but certainly worth understanding for major gift or campaign possibilities.

Good times or not for planned giving?

What the latest estate tax change has done is throw real havoc into everyone’s estate plans.  Now, anyone with formula clauses in their estate plans has to see their attorneys, and pronto.  But wait, we don’t know what the estate tax will be come January 1, 2013.  The President is already talking about scaling back the per person exemption to $3.5 million.  Others are always yapping about the dreaded death tax (which less than 1% or so of the U.S. population has to even worry about it at this point, at least the federal death tax).

What we saw in the years leading to 2010 was a wait and see attitude – let’s wait and see what Congress will finally do with the estate tax.  Now, the attitude will be more like: let’s redo this estate plan NOW, knowing that we may need to redo it all over again in 2013.

This, by the way, is good news for planned giving.  Getting into people’s wills is not a simple task.  Your charity has to become family.  You might need to tell the donor in multiple ways (less than 50% of American even have wills and only 8% leaving anything to charity even if they have wills!).  Then, there is timing.  You need to time all of your planned giving messaging to impact your donor when he is sitting with his attorney.

Well, at least we know people finally need to sit down with their attorneys.  And, as human nature has it, once your nonprofit is in the will there is a good chance you’ll stay in it.

Obama budget proposal

Robert Sharpe had plenty of great, sharp quotes on the Obama administration’s budget proposals in regard to tax laws effecting charitable giving.  While this blogger doesn’t like to report on proposals (as they are generally pretty worthless), we have to take notice when proposed tax changes will actually put a price tag on charitable giving.

One proposal creates a 28% cap on charitable deductibility, even if you are in higher bracket – let’s say 39.6% (his example).  Apparently, a donor of $10,000 in the 39.6% bracket would only be able to deduct $2,800 (not $3,960 under today’s law).  That is a cost of $1,160 to this donor in lost tax savings.  Not something we in the nonprofit world want to see happen.

All of these proposals, and the future estate tax, are just a part of the next Presidential campaign.  In other words, don’t expect a well thought out solution to this area – expect political expediency to rule the day and don’t forget to see your attorney.

Thank you again to Robert Sharpe for another excellent presentation!


  1. I left out any talk about Lead Trusts! How could I? It was a major point in Robert Sharpe’s talk and it is a major opportunity!

    Well, the answer is that I focused on points that were glaring and digestible (i.e. easy to understand). Sadly, Lead Trusts are the least understood planned giving vehicle and it will take more than a few sentences to do justice to the topic.

    A Lead Trust discussion will have to wait for a longer, more detailed article.

  2. Lots of food for thought and well captures the highlights of the Sharpe presentation. One small quibble: we should be very careful about calling any estate or inheritance tax a “death tax,” even casually. “Death tax” is a political term, and as such, should be avoided unless one if making a political statement (which is generally not advisable if you work for a charity as more than one of my donors has told me over the years!).

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