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Wealth Transfer …. What Wealth Transfer?

Robert F. Sharpe, Jr. addresses why there’s been little increase in wealth transferred to charities through estates in recent history.

Anyone engaged in asset management and/or assisting clients in planning for the eventual transfer of their assets has spent the last 20 years hearing about the “Great American Wealth Transfer.”  

Prominently featured in the predictions of this vast transfer of wealth was the promise of a Golden Age of Philanthropy with trillions upon trillions of dollars expected to flow to the U.S. non-profit world as a component of the transfer.

Many in the for-profit financial and philanthropic fund development world took these predictions very much to heart and greatly expanded efforts intended to maximize their slice of the promised pie.

Unfortunately, for a number of reasons, this charitable cornucopia hasn’t yet materialized despite two decades of patient anticipation. In fact, according to broad industry reports such as Giving USA and specialized reports from the Council for Aid to Education detailing giving trends to higher education, there’s been very little real increase in wealth transferred to charities through estates over the first 18 years of the transfer period. (See “No Charitable Windfall” and “Disappointing Results,” both this page.) 

 

Over the last 18 years, bequests reported to charity totaled $428 billion.1 Charities were told to expect to receive at least $1.7 trillion at the low end of the wealth transfer during that time frame.2 Keep in mind the period of the entire projected wealth transfer was 55 years, from 1998 to 2053. Simple math reveals that to hit the minimum charitable amount of $6 trillion for the entire transfer, bequest income to nonprofits would have to average $150 billion per year for the next 37 years, some seven times the annual average of the last 18 years.

There have been adjustments to the original amount of the wealth transfer over time, and one can quibble over the exact value of the assets to be transferred depending on various investment return assumptions. But, let’s put the ultimate dollar figure aside for now and focus more on what actually happened and what’s likely to transpire going forward.

Where’s the Beef?

Where’s the disconnect? What happened to stall the wealth transfer? Has it been permanently derailed or just delayed?

The answer may lie in a number of interrelated factors, including economic conditions, redistribution of wealth, demographic trends and other factors such as wealth “transferred” to the medical and health insurance sectors of the economy due to advances in medical care.

As noted above, there’s been little real growth over the past 18 years in the amount of bequests received by charities. The number of charitable remainder trusts (CRTs) and other split-interest gifts reported by the Internal Revenue Service has been flat, and outright individual giving has also shown little real growth.  

Regardless of how much it may be, the charitable windfall hasn’t yet occurred, and the pie that’s actually materialized has been split in many more ways as competition has intensified with the increasing number of charities that were attracted by the expected boom.  

Keep in mind that the amount of wealth that’s transferred is a function not only of the amount of wealth and the number of recipients, but also of the trends in the number of individuals passing away. It’s interesting to note that from 1998 to 2010, the number of individuals passing away was less than projected by the U.S. Census Bureau and was essentially flat and even down in some years for the first time in history. (See “Staying Alive,” this page.) 

This was a result of two primary factors. First, the dip in birth rates in the United States between 1925 and 1945 translated into fewer deaths in recent decades. (See “Primary Reason for Fewer Deaths,” p. 11.)

Studies reveal that some 80 percent of those who leave bequests to charity die after the age of 80.3 This would naturally translate into fewer charitable decedents from roughly 2005 to 2025.  

Adding to this demographic phenomenon has been the impact of advances in medical care that’s resulted in extending the life expectancies of those fewer number of individuals who were born, leading to additional downward pressure on the numbers of charitable bequests.  

The economy has also had an impact on the size of charitable bequests. When investment values plummeted at the outset of the Great Recession, many retirees “cashed out” of the markets and didn’t participate in the recovery.  

There was, in effect, an unanticipated “wealth transfer,” as subsequent record growth in investment values rebounded to the benefit of the relatively younger investors with higher risk tolerance who continued regular contributions to 401(k)s and other tax-favored retirement plans. This phenomenon resulted in wealth that was owned by older individuals prior to the crash essentially being transferred to a younger generation, while the older generation was still alive—rather than through estates at death.

While home values may have recovered in much of the country, many of those older investors who suffered recession-related losses have also struggled with meager returns on the assets that remained. Increasing numbers have of necessity annuitized their assets, leaving less to distribute to both charitable and non-charitable beneficiaries at their deaths.

Darkest Before the Dawn?

Philanthropic planners should take heart, however, as the wealth transfer may now be finally beginning to accelerate. The number of deaths in the United States is beginning to rise again over the past few years, growing from the 2.4 to 2.5 million level from 2000 to 2010 to over 2.7 million decedents in recent years. (See “Death Rate Increases,” p. 11.)

Recent increases in death rates are being driven by the increase in births beginning in the mid-1930s as well as the “delayed” deaths of those in the G.I. generation (those born between 1901 and 1924) and the Silent generation (those born between 1925 and 1945), whose lives were extended by medical advances.  

Beginning in the early years of the next decade, the mortality of the leading edge of the Baby Boomers should finally result in the flowering of the wealth transfer, albeit some 25 years after it was initially heralded.

How Will Baby Boomers Boom?

The Baby Boomer generation differs in many respects from the G.I. and Silent generations that preceded it, and early indications are that charitable beneficiaries should expect some significant differences in the way Baby Boomers approach the process of planning for philanthropic transfers.

They’re more likely to have college degrees and are generally more financially sophisticated than their elders. They have, in many cases, worked their entire careers participating in qualified retirement plans that were only introduced at mid-career for many of today’s decedents. As a result, the bulk of many of their estates will be transferred through beneficiary designations governing the assets remaining in these accounts.

Because these assets represent income in respect of a decedent when received by heirs, it will be important to help clients design charitable giving strategies that result in making the best use of these assets to fund charitable dispositions, while using other property that isn’t subject to income tax to fulfill gifts to children and other heirs.

Baby Boomers may also be the first generation in over a century that won’t need to consider the impact of federal estate taxes when engaging in their final estate planning.  

While federal estate taxes don’t currently apply to 99.9 percent of decedents, the general population perceives these taxes as playing a greater role than is actually the case. Some in the non-profit world are concerned that a very public repeal of this tax could lead to less charitable giving.

In reality, this is counter-intuitive because anyone with a taxable estate that’s left assets to charity in the past has done so at a real cost to other heirs. These estates were split among taxes, family and charity. The family bore the entire amount of any tax due. With an elimination of the estate tax, the family will owe nothing on their portion of the estate and will actually receive more, while the charity receives the same amount. 

For example, suppose an individual with an estate valued at $10 million plans to leave a $1 million bequest to charity, with the remainder to his children. Under today’s law, his children receive the remainder after payment of estate tax of, say, $2 million, netting $7 million. With repeal of the estate tax, the charity still receives $1 million, while the family would net $9 million (less any tax due in the case of the minority of Americans who live in states that impose levies on estates).  

Would an otherwise motivated donor remove this bequest because of an estate tax repeal? IRS data reveals that year in and year out, only about 20 percent of taxable estates on average include bequests to charity.4 The remaining 80 percent, many of whom have made charitable gifts during their lifetimes, choose not to leave charitable bequests and pay the tax due on the amount left to their heirs.5 

I believe charitably inclined individuals will, in most cases, continue to leave the same, if not more, to charity when they realize their other heirs are receiving a windfall as a result of estate tax repeal. Surveys of the wealthy bear this out.6  

In any event, absent an estate tax factor, Baby Boomers may plan their charitable gifts in ways that allow them to enjoy tax benefits while they’re living. This may mean more outright lifetime giving that serves to reduce income taxes or more gifts through CRTs and other split-interest gifts that yield income and current tax benefits for a gift that isn’t completed until the death of one or more individuals or the passage of another period of time determined by the donor.

The outcome of current tax reform discussions will largely determine the extent to which donors engage in this type of planning.

Adopting Charities

Baby Boomers also married later and are more likely to be childless than earlier generations. Some have estimated that about one-third or more of Baby Boomers are childless, a much higher rate than the G.I. and Silent generations. For those generations, that figure was closer to 10 percent.7 

Childless individuals often tend to accumulate more assets on account of their childless status. They’re also more concerned about their long-term health care provisions as they can’t rely on natural heirs to care for them.

Some Boomers are addressing their lack of heirs by, in effect, “adopting” charities in their later years, as they look for ways to leave a legacy behind other than through progeny. Planners should be aware of this factor and respect these philanthropic-based  relationships as mutually beneficial arrangements in many cases, while also looking to protect the interests of their clients.

Studies have shown that the average age of beneficiaries of CRTs is 68 at the time of creation of the trust.8 The average age of charitable gift annuity (CGA) donors is around 79.9 With the number of people in these age ranges about to skyrocket over the coming two decades, I predict a period of unprecedented growth in split-interest gifts along with more traditional testamentary transfers.10 

For childless or single clients/donors, CGAs, CRTs and other plans will not only feature welcome tax benefits, they’ll also represent a form of asset protection and a means of foiling financial predators in clients’ later years. Irrevocable split-interest gifts can also be designed to provide fixed or variable income that may be higher than what they would earn from other sources.  

In the case of a CGA, childless donors also enjoy the knowledge that the entire asset base of the charity issuing the annuity stands behind their payments and, hence, provides a source of income they believe they’re less likely not to outlive.  

For those who would like to see growth in income over time, a charitable remainder unitrust can be a way to increase the likelihood of this outcome as the charitable beneficiary will be monitoring investment performance and looking for growth that will also lead to increased income for the donor.  

The interests of the donor and the charity are therefore aligned in this case. A client/donor may take comfort in knowing that in case of mental impairment with no natural heirs to protect him, the self-interest of the charity will naturally lead to oversight of those responsible for asset management.

Be Prepared to Aid the Transfer

For many reasons, I believe it’s finally time to prepare for what truly may be a Golden Age of Philanthropy. Those who are prepared to help donors execute their charitable plans can participate in a category of services that can not only represent a source of additional revenue, but also provide satisfaction that can be gained in helping clients make what may well be their gift of a lifetime.

Endnotes

1. Giving USA 2016.

2. John J. Havens and Paul G. Schervish, “Millionaires and the Millennium: New Estimates of the Forthcoming Wealth Transfer and the Prospects for a Golden Age of Philanthropy,” Boston College Social Welfare Research Institute Report (Oct. 19, 1999).

3. Dr. Russell James, American Charitable Bequest Demographics (1992-2012) (2013), at p. 54, www.amazon.com/American-Charitable-Bequest-Demographics-Russell-ebook/dp/B00EVS95HQ.

4. Internal Revenue Service Tax Statistics, www.IRS.gov.

5. Ibid.

6. http://newsroom.bankofamerica.com/files/press_kit/additional/2016_US_Trust_Study_of_High_Net_Worth_Philanthropy_-_Executive_Summary.pdf.

7. www.eurekalert.org/pub_releases/2015-05/nsij-abb051315.php; www.orlandosentinel.com/health/aging/os-wapo-aging-solo-boomers-without-children-20160822-story.html.

8. Holly Hall, “Surge of Remainder Trusts Seen as Baby Boomers Age,” The Chronicle of Philanthropy (July 10, 2014), www.philanthropy.com/article/Surge-of-Remainder-Trusts-Seen/150509.

9. www.acga-web.org/about-gift-annuities-top/gift-annuity-best-practices.

10. www.wealthmanagement.com/philanthropy/resurgence-charitable-trusts.

 

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