Déjà Vu All Over Again: Gift Planning 2001
By Jeff Comfort
From the vantage point of the new year, a quick review of the landscape of philanthropy and charitable giving in 2000 prompts a quote from Yogi Berra, "This is like déjà vu all over again." Just as in January 2000, tax reform, including a repeal of the gift and estate tax, looms ominously, and has been analyzed extensively in the press for the past several months, but ultimately to no real avail. Just like the year before, we are looking back on yet another year added to the longest economic expansion in our nation’s history. And just like last year, we are looking at another year of growth in philanthropic gifts, especially in the field of charitable gift planning.
Looking forward into 2001, some pundits suggest it could be a whole new ballgame in the worlds of finance and philanthropy. There is a new administration following an unusual if not unprecedented election process. There is an entirely newly elected House of Representatives with a smaller Republican majority and a virtually balanced Senate. There is an economy that is widely becoming known as "the new economy."
In considering philanthropy and charitable giving, will this year, indeed, bring a whole new ballgame or just a few new political and economic forks in the road? On the whole, the environment for charitable giving may be very similar to what we faced at this time last year, with a few notable exceptions.
So where does the path of philanthropy and charitable giving lead this year? Politics, taxes, the economy and other factors surely have influenced, and will continue to influence, donors and their philanthropic decisions and activities. While these factors do have influence, the heart of philanthropy has been and always will be donative intent. Individually, each donor of a charitable gift has a different definition of the donative intent that motivated him or her to make a gift. Collectively, this donative intent can be summed up in general terms like "making a difference" or "leaving a legacy."
Individually or collectively as a society, philanthropy and charitable giving ultimately hinge on two elements: inclination and capacity. If an individual or a society has the philanthropic inclination to leave a legacy, then all that is needed is the capacity to do so.
Philanthropy is a hallmark of our American society. It is a distinguishing attribute of our heritage and our culture as a nation among nations. Our country is blessed with a citizenry, which on the whole, has a deep-rooted inclination to make a difference through current gifts for this generation, and through legacies for the future generations.
The philanthropic inclination to give continues to shine in the hearts and souls of many of our clients. The capacity is there as well, fueled in large part by the recent extraordinary economy. It is the job of professional advisors to assist these philanthropists in making their gifts wisely and efficiently.
Beyond the usual array of factors to be taken into consideration when helping a client make a wise and efficient gift, what special dynamics may the year 2001 bring into play? What landmarks lay ahead this year in the world of philanthropy and charitable giving? Clearly the dynamics of politics and the economy could offer some unusual factors for consideration this year.
Philanthropy is sure to face some challenges and reap some benefits in the new political arena, as well as continue to face some challenges and reap some benefits from politics from decades past. In the new political arena, at least two legislative landmarks and a pervasive climate may impact the path of philanthropy this year. The two landmarks may be: 1) the Charitable IRA Rollover legislation; and 2) the gift and estate tax reform movement.
The Charitable IRA Rollover
As a charitable gift planner, I frequently receive telephone calls from prospective donors expressing an interest in establishing and funding a charitable remainder trust. The conversation usually begins with a discussion on the plan itself and how a charitable remainder trust works. At some point, the discussion moves to the proposed funding asset. Not a month goes by without one of these calls resulting in the discovery that the proposed funding assets are currently held in the prospective donor’s qualified retirement plan. It is difficult for these prospective donors to understand that, under current tax law, they will need to pay significant income taxes in order to make a charitable gift through a remainder trust.
Tremendous wealth is currently held in qualified retirement plans. According to 1998 Census Bureau statistics, it is estimated that there is over $6.4 trillion held in individuals’ qualified retirement plans. In most cases, these retirement plan assets will be needed to fund an individual’s financial needs through retirement years. In some cases, however, wealthy individuals have huge retirement-plan holdings that will never be needed. These holdings come with a complex set of rules and requirements that for many are simply a burden. These are obvious assets to look to as a source for charitable gifts, and yet our current tax laws provide additional complexity and often trigger tax consequences before a charitable gift can be made.
In recent years, the philanthropic community, spearheaded by groups like the National Committee on Planned Giving, has made headway in advancing legislation that would allow for tax-free withdrawals from IRAs for charitable gifts. These efforts are commonly labeled with the sometimes-confusing misnomer, "Charitable IRA Rollover" legislation. For the past two years, legislation that would allow for tax-free withdrawals, at least for outright gifts for donors age 70-1/2 and older, has been included in the tax bills sent to the White House. The overall tax bills themselves have been vetoed and resulted in the death of the Charitable IRA Rollover legislation each year.
Perhaps reflecting a character flaw of over-optimism, this writer will go out on a limb and predict that this year will bring the successful enactment of tax laws that will provide for the tax-free withdrawal of IRA assets for charitable gifts. This could be a monumental landmark for philanthropy, and a tremendous planning opportunity for all involved in the charitable gift planning community.
Effort to Repeal the Gift and Estate Tax
The second landmark ahead will be the continued effort for the repeal of the gift and estate tax laws, almost certain to resurface again this year. Many in the charitable community and elsewhere have argued exhaustively on the moral implications of this political movement. It can be difficult, and highly problematic, to argue in favor of any particular tax, especially one that has been labeled as the "death tax," but from a philanthropic standpoint, it is easy to advocate for a tax system that encourages and benefits charitable giving.
Does the gift and estate tax actually encourage charitable giving and, in particular, charitable bequests or charitable lead trusts? Clearly in some individual cases, or in some demographics, the answer is yes. Just as clearly, in some individual cases, or in some demographics, the answer is no.
Climate of Uncertainty
Some suggest that a reform of the gift and estate tax is probable, but in a more moderate form such as an increased exemption amount. Whether or not a complete repeal of the gift and estate tax is passed (and this writer has doubts that it will pass), and whether or not a complete repeal would negatively affect charitable giving (and again, this writer has doubts that it would) the impact on charitable giving of the mere continued discussion of repealing the tax is more certain for 2001: uncertainty. The almost inevitable proposed legislation for the complete repeal of the gift and estate tax will undoubtedly lead to a a climate of uncertainty in the philanthropic community. That uncertainty itself will impact the charitable planning process and delay charitable gifts. Nothing puts major planned gifts on hold like uncertainty.
For many testamentary gifts in the planning process, 2001 will be a year of "wait and see." There are numerous strategies to employ with clients having the "wait and see" attitude. For example, one could compare the financial and tax benefits of moving forward now with a possible worst case scenario for future legislation, whatever that may be. Often an individual, with an inclination and the capacity to make a gift, would be better served by moving forward with that gift now.
What about the economy and the stock market? How may these affect philanthropy in 2001? On the one hand, perhaps this year will bring a Dow 5000. On the other, perhaps this year will bring a Dow 20000. Given that so many U.S. citizens now have a stake in the stock market, it seems probable that Congress and the White House will be under constant pressure to do whatever is necessary to maintain economic policies favorable toward stock prices. The end of the year 2000 brought increasing uncertainty about the prospects for a continued economic expansion. Historical data demonstrates that philanthropy can fare well through economic expansions as well as recessions. It is only the possibility of uncertainty in economic direction that could put major planned gifts on hold.
American philanthropy is very different from philanthropy anywhere else in the world. America, from the beginning, has been characterized as a philanthropic nation. First by acts of volunteerism, then later through more institutionalized charitable methods. Remarkably, however, in the last decade of the twentieth century, there is some evidence of a trend back toward personal humanitarianism, and this humanitarianism – Americans need to help others – will always outweigh any economic trends or legislation. Because of this need to help others, the future will continue to look very bright for gift planning.