New Estate Tax Law Could Hurt Charity

December 28, 2011; Source: Forbes | A tax lawyer writing for Forbes suggests that the new tax bill's reinstatement of the estate tax isn't going to be much of an incentive for lifetime charitable giving or charitable bequests. Had the Bush tax cuts expired, the estate tax would have been reinstated with an exemption of $1 million per person and a tax rate of 55 percent. The compromise tax bill set the exemption from the federal estate tax at $5 million per person and the estate tax rate at 35 percent.

According to the Forbes author, Deborah Jacobs, as a result of the higher estate tax exemption and lower estate tax rate, "except for the super wealthy, the tax benefits of giving through an estate plan have been wiped out." Her point is that to the superwealthy like Buffett, Gates, and Zuckerberg whose estates are larger than these exemptions by several digits, these exemptions mean nothing.

They give while alive, signing on to Buffett's billionaire pledge, and they will make their plan for bequests from their estates. But for people with multi-million dollar rather than multi-billion dollar estates, the new lower estate tax changes their charitable calculations. They might have given more away while alive if they knew that their estates would be hit with a 55 percent tax on assets above $1 million.

But if the trigger is $5 million per person (or $10 million per couple), according to Jacobson, "most people do not need to be concerned about pruning their net worth through lifetime gifts, whether to charity or to family." In other words, a much smaller set of estates will be hit with the estate tax if the exemption is $5 million rather than $1 million. In addition, the tax savings for a charitable bequest are only 35 cents on the dollar rather than 55 cents, so the new estate tax is a lesser incentive for bequests.

While the nonprofit sector lobbied – successfully – for the inclusion of the IRA charitable rollover in the tax bill, Jacobs contends that "charities mostly stood on the sidelines during the 2010 debate over reinstating the estate tax, [because] had they openly lobbied for [a higher estate tax rate and a lower exemption], they would have angered potential donors."—Rick Cohen