New Estate Tax Law Could Hurt Charity

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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

  • Adam Nicholson

    One important clarification: while the estate tax change may lower end-of-life charitable bequests, the economic research shows that a lower (or repealed) estate tax could actually increase net charitable giving.

    In fact, the Chronicle of Philanthropy wrote that “eliminating the federal estate tax would not cause most people, including the wealthiest Americans, to change their charitable-giving habits.”

    To read more, please see:

  • rick cohen

    Thanks for your comment, Adam. As you know I was writing about the perspective of the article from Forbes with that author’s perspective regarding the tax incentive. The article you cite wasn’t a finding written by the Chronicle, it was an article from 2001 reporting on a survey for Worth magazine conducted by Harris Interactive. I’m sure you know that there are plenty of studies that counter that 2001 survey finding. On the Americans for a Fair Estate Tax webpage (, I found this quote to the contrary: “Repeal or bad reform of the estate tax would have a damaging effect on the nation’s charities. The
    Congressional Budget Office has estimated full repeal would cost charities and nonprofits $20 billion per year
    in charitable donations if the tax had been repealed in 2000. Other studies have shown that the most significant
    incentive for charitable contributions from estates is the top tax rate. When the top estate tax rate was reduced
    in 2003 from 55% to 49%, the IRS found an 18.2% decline in charitable bequests compared to the previous
    year.” I did a lot of writing about the estate tax some years ago, compiling lots of the studies for and against the impact of the repeal on charitable bequests (and on lifetime giving, which is related, as the Forbes article notes). I most distinctly remember a survey of wealthy people regarding their charitable giving motivations, with the observation that many or most of the people interviewed said that they, of course, gave to charity because they cared, not because of the tax benefits, but they were sure that their peers gave because of the tax benefit. You and I can both interpret that statement. My position, however, is that the issue of the estate tax’s incentivizing charitable giving is not relevant for whether it should be kept or not. The fact that it might spur a wealthy person to give to charities in order to avoid paying the government is not germane. The issue pro or con the estate tax is, is it right, it is effective, is it efficacious, is it fair to tax estates, and if so, at what rate and with what exemption. Its impact on charitable bequests to me is a secondary consideration. Thank you for reading, Adam.

    Rick Cohen