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Adjust client philanthropy plans now

Ever since proposals started brewing last year for the proposed repeal of the estate tax, there has been significant debate within gift planning circles about what the potential repeal would mean for the future of philanthropy. Some prognosticators predicted a horribly gloomy scenario for charitable giving while others were more optimistic (including this author). So, now that the Economic Growth

Ever since proposals started brewing last year for the proposed repeal of the estate tax, there has been significant debate within gift planning circles about what the potential repeal would mean for the future of philanthropy. Some prognosticators predicted a horribly gloomy scenario for charitable giving while others were more optimistic (including this author). So, now that the Economic Growth and Tax Relief Reconciliation Act of 20011 (the Tax Act) has passed, what will the future hold for charitable giving? While ‘He (or she) who lives by the crystal ball, is bound to eat glass"2, this article will attempt to substantiate the opinion that the Tax Act actually may create a better and more flourishing environment for philanthropy, and it certainly did not hurt it. This optimistic view is borne out by interactions with high-net-worth individuals, industry studies, and the actual structure of the Tax Act.

What Did The Tax Act Really Do?

When all is said and done, the net effect of the Tax Act from a philanthropic planning perspective is much less drastic and more tenuous than originally predicted3. Although the repeal of the estate tax is technically enacted, it is not slated to occur until 2010 – there will be two Presidential elections and four Congressional elections in the interim, which means the Tax Act may see substantial revisions over the next nine years. As if that were not enough long-range uncertainty, the Tax Act provides a "sunset" provision whereby all these tax law changes will magically disappear one year later in 2011 unless extended by a future bill4. Therefore, in some shape or form, the estate tax remains for many years to come and should continue to be a consideration during the wealth planning process, including philanthropic planning.

One certain effect of the Tax Act will be the need for most individuals to review their current estate planning documents with their advisors. It is very important that all existing Wills and trusts be reconsidered to determine the effect of the Tax Act in light of the original intentions of the testator/trustor. This will be especially important in medium-sized estates ($2 million to 10 million) where the new exemption amounts will have the greatest impact. For example, the increasing exemption amounts will require reexamination of dispositions to family and other loved ones. Some provisions may reflect the eventuality of paying an estate tax and, if repeal occurs, could make such provisions unnecessary and contrary to the true intentions of the individual.

Since this is a time when everyone will be urged to reexamine their planning documents in light of the changing tax landscape, it presents a rare opportunity to remind your clients or constituencies (if you represent a charity) to consider a charitable gift, whether it be inter vivos or testamentary. While financial professionals and charitable planners are in the process of reconnecting with their clients, it is the ideal occasion to further explore the philanthropist in your clients, and there generally is one.

What Are The Real Reasons People Include Philanthropy In Their Planning?

Let us not forget that charitable bequests were being made long before there was an estate tax to worry about. Whether the estate tax exists or not, numerous studies indicate that the primary motivator of individuals to give is not taxation. In one recent survey, 73 percent of wealthy people said the estate tax repeal would not change their giving behavior, while 89 percent of the entire population said the loss of the estate tax wouldn’t alter their donation patterns5. Last year the National Committee on Planned Giving (NCPG) released its updated donor survey, Planned Giving in the United States 2000,6 with the objective of identifying trends in charitable giving, including motivations for making a planned gift. The results show unequivocally that the top reason people create a charitable bequest, establish a charitable remainder trust or other planned gift is the desire to support the charitable organization and its mission. Charitable intent as a key motivating factor was much more of a priority than financial or tax considerations. This conclusion has also been supported by other studies of high-net-worth families, all of which conclude that the single most important motivation for giving is funding a cause they "feel passionate" about.

In the area of wealth planning and charitable gift planning, interactions with our high-net-worth individuals substantiate these conclusions. What is truly important to most of our clients during the profiling and planning process is setting up a multi-generational estate plan. Such a plan typically involves the individual and their family creating a family vision and wealth mission to define their legacy. When you start from the perspective of the client’s vision, family values, attitudes, circumstances, hopes, and future dreams (rather than how to preserve their $25 million or grow it to $100 million), some type of charitable giving vehicle regularly becomes a key focus of the plan.

The elimination of the estate tax would leave high-net-worth individuals with more disposable assets. If such people no longer have to pay up to half of their net worth at death to the government in the form of estate taxes, there will be millions of additional tax-free dollars to distribute thoughtfully and responsibly. Basically, two choices will remain for those extra dollars: leave a legacy by creating a charitable gift or give it all to family, typically their children. Philanthropy is likely to be the first choice because one of the primary issues which regularly arises when advising the super-rich is leaving too much money to their children. Parents are concerned about the effects that an overabundance of wealth may have on their children; they want to instill responsibility, community spirit, and enhance the quality of their relationship with their children. Many wealthy people follow the philosophy of the esteemed billionaire Warren Buffet, who so wisely stated that he wanted to leave his children enough that they could do anything, but not so much that they do nothing with their lives. This goal is directly achieved by using philanthropic planning as a financial parenting tool with your clients. As a result, public charities and private foundations stand to be the major beneficiaries of an eventual repeal of the estate tax.

What About Charitable Giving Until Repeal?

Until (and if) the estate tax is fully repealed, charitable planning will continue to be an integral part of wealth planning. The entire arena of planned giving provides numerous mechanisms for people at all stages of wealth to make inter vivos charitable gifts while also helping themselves and/or their loved ones. The Tax Act has made no changes that should significantly affect this scenario in the near future. For example, the capital gains tax remains intact, so charitable gifts of appreciated assets to a private foundation or other charitable vehicle continue to be very appealing. Planned giving vehicles (such as charitable remainder trusts and gift annuities) which allow the donor to bypass capital gains taxes on appreciated assets, receive a stream of lifetime income, take an immediate income tax deduction (which can be carried over for five years), and then leave a charitable gift, will continue be popular.

Even though some charities may have experienced a slowdown in the creation of such vehicles while the Tax Act was being debated, it is our current economic volatility which has more directly affected philanthropy as certain assets of prospective donors are no longer as appreciated as they once were. Additionally, donor uncertainty about what the economic future holds cannot be discounted as a key factor in the psychology of giving. So, while our economic situation may continue to have an impact on philanthropy in the short term, the final version of the Tax Act should not.

What About Charitable Giving If Repeal Occurs?

Assuming repeal was to take place in 2010 (and then sunset the next year), charitable giving will still continue to thrive and serve an important role in the wealth planning process. This is true for several reasons. First, as discussed above, even if people don’t face paying estate taxes on their accumulated wealth, there is a common attitude among the wealthy that all their assets should not be passed to the next generation. Instead, they are focused on establishing philanthropic vehicles which will provide their family with a values based outlook, such as a private foundation or a donor advised fund. Through such vehicles, their family will be brought together to learn responsibility, self-esteem and self-reliance while also making an important impact on their communities and society.

Another interesting aspect of the Tax Act is the carryover provision whereby property acquired from an estate after 2009 will take a carryover basis in the hands of the recipient. Until 2010, the existing rules provide for a fair market value (i.e. stepped up) basis for property acquired from a decedent. Because the Tax Act does provide three exceptions to the carryover basis rule, including a $3 million spousal exemption, it is likely that a majority of the population will not be greatly affected by this new rule. Nevertheless, to the extent some inheriting individuals are affected, charitable bequests will be a viable planning technique for such low-basis property. By allocating a decedent’s lower basis property to charities of choice, the overall tax situation of the family beneficiaries will be optimized. For similar reasons under current law, gift planners regularly suggest that their clients allocate their retirement plan assets to charity at death. Similarly, charitable remainder trusts, inter vivos or testamentary, and outright charitable contributions are great options for dealing with such low basis property during the testator’s life or when inherited by the next generation.


The Tax Act has created uncertainty, which generates activity in the wealth- planning arena. Rather than eliminating the need for charitable planning, it has enhanced it. With all the changes afoot, the Tax Act creates the need for thoughtful wealth planning, triggering the professional to discuss emotional factors that drive their clients in their interactions with family and society. Financial professionals will want to take a comprehensive wealth-planning approach that goes beyond the technical planning tools, and incorporates their clients’ values and dreams. No longer can the planning professional attempt to motivate solely out of the fear of estate taxes but must look to more human, all-encompassing motivations. This is precisely where philanthropy will play a key role.

In the past, many estate planning professionals and even gift planners were quick to use estate tax as a key motivation tool in the wealth-planning process especially when discussing charitable giving. As this article has pointed out, tax considerations are not the primary reason most people include some form of philanthropy in their plans. Therefore, the eventual repeal of the estate tax is not a situation that will put philanthropy at risk. Rather, the Tax Act provides a great opportunity to work with your clients and donors to craft a plan around their personal goals, values and objectives for themselves, their family, friends and community. This can truly be accomplished through philanthropic planning in all its varied forms.tu

The opinions expressed in this article are those of the author and do not reflect the opinions of Wells Fargo or its management.

Janice H. Burrill ([email protected] is Senior Vice President and National Director of the Charitable Management Group for Private Client Services at Wells Fargo Bank, N.A. focusing on philanthropic services for private clients and charitable organizations, especially in the area of planned giving. She is a licensed attorney and previously practiced law with both Shearman & Sterling and Graham & James.

The author would like to personally thank and acknowledge the invaluable input of various team members in Private Client Services at Wells Fargo, most especially Michael Cole, National Sales Director, and Shana Primack, manager of family foundation services.


1. Public Law 107-16, enacted June 7, 2001.

2. Conrad Teitell, J.D. Cummings & Lockwood

3. Other than two small changes relating to conservation easements, the Tax Act made no significant changes to the rules for charitable contribution deductions. As of the writing of this article, a new package of tax incentives for charitable giving is contained in H.R. 7, the Community Solutions Act, and is being closely watched by the charitable community.

4. The Byrd rule under the Congressional Budget Act of 1974.

5. " Wealth Pulse: Wealth and Giving";

6p. The written report can be obtained from NCPG at (317) 269-6274 or through it’s website (

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