Private Client Services Update – Some Charitable Giving Thoughts Under Tax Laws Past, Present and Future

    By Lewis W. Webb III, Estate, Trust & Wealth Transfer

    A recent request from a non-profit to help them develop a proposal for a significant donor solicitation caused me to reflect again on the big picture of charitable giving, with some interesting results when the math is viewed from a multi-generational perspective.

    General Charitable Giving Math

    Thanks to the tax benefits of charitable giving, the out of pocket cost to a family of dollars gifted to charity can be significantly reduced. A layered approach best illustrates this concept.

    From a pure estate tax perspective, the ultimate cost to children of a gift made by their parents may only be 55%of assets gifted (using estate tax rates of 45%, which I assume we will get back to in short order and at least by 2011 — more on this later).

    Factoring in the additional income tax deduction for gifts made during life, it is possible for a gift to only cost the children 33% of assets gifted (assuming a combined state and federal income tax rate of 40%).

    When combined with other tools, which typically take advantage of time value of money concepts and the ability to earn rates of return in excess of that assumed by the IRS (for example, charitable lead trusts), it is even possible at times for the cost to the children to be reduced to 25%, or less, of the gift made.

    Note that the larger the gift, the more planning will be needed to make the tax benefits actually happen. This typically requires synergies with other assets and/or the use of multiple tax planning tools. Often opportunities arise in this planning for non-tax benefits to the donor (for example, the reduction of a donor’s marginal income tax bracket and the ability to invest in higher-yielding investments that are tax-sheltered by the charitable donation).

    The primary factors in planning for charitable gifts can be summarized as follows:

    1. donor’s intent, desire and drive to make the gift happen;
    2. donor’s particular facts and asset opportunities;
    3. use of estate and income tax concepts and tools generated by the donor’s tax advisors; and
    4. investment returns and income that can be generated from donor’s business assets and/or by his investment advisors.

    Of these, obviously the donor’s intent is the most important and hopefully, the donor’s personal satisfaction from what his donated dollars will be able to achieve is his greatest reward. Financially, though, it can be possible for a hypothetical $1,000,000 gift to charity to only result in a cost to the family of $250,000, or even less. As indicated, it often takes significant planning to achieve results like these.

    Charitable Giving Thoughts in Light of the Current Estate Tax Laws

    Arguably, given the right circumstances and strong donor desire, the current state of the estate tax law should not be a major factor in current charitable gifting decisions.

    Many of our wealthy clients are confident that their families will have appropriate levels of financial resources (and thus are considering significant charitable gifts in the first place).

    For example, under the tax laws that existed in 2009, for clients with assets of $50,000,000, their estates at the first to die would be fully available for their spouses and, after 1) a $10,000,000 charitable gift, 2) the payment of estate taxes imposed at the death of the second to die, and 3) assuming two children, each child would receive over $12,500,000 in assets, plus the benefit of other gifts and planning tools already put into motion.

    The larger the asset base, the more likely it is that our clients actually have a limit on the level of assets they deem healthy for their children to inherit (of course, all bets are off when it comes to the grandchildren!). Under this example, while no one likes paying taxes, the parents might be comfortable that the number of assets left to the children was appropriate and the parents would also have satisfied in a significant way their charitable desires.

    As the law currently stands in 2010, the full $50,000,000 would go to the children (ignoring the effects of carryover basis) and thus a $10,000,000 gift to charity would leave each child with $20,000,000, far ahead of the $12,500,000 each would receive under prior law. In other words, donors may be more comfortable making large charitable gifts under current law, as there is ‘found’ money on the table and perhaps more concern about the possible negative effects of too much wealth (this issue certainly raises its head at much lower asset levels than this).

    As we have all read, the options on the table for the law in 2011 (or some version retroactive into 2010) center around $3.5 to $5 million (or above) in unified credit and 45% and lower in tax rates (i.e., at ‘worst’ case, back to at least $12,500,000 per child, with significant political pressure to reduce estate taxes even more).

    Congress could be dysfunctional and leave the scheduled 2011 tax law in place (with $1 million in unified credit). In such an event, all of our wealthy clients will be making full use of such leveraging tools as charitable lead trusts and the like anyway.

    In short, 1) in a world in which it takes a number of years to maximize the tax benefits from a significant gift, 2) there is a time value of money advantage to start tax and investment tools working, and 3) in a year offering special planning opportunities (such as combining a Roth conversion with a charitable gift), it might be the case that sitting on the sidelines while Congress is figuring out what to do is neither prudent nor financially beneficial to the donor. As an advisor, I typically err on the side of caution, but under the right circumstances, moving ahead with a gift may actually make the most sense.

    Lewis W. Webb III is Chair of the firm’s Tax Department and Private Client Services Group. He has traditionally represented high net worth individuals and owners of closely-held businesses in all areas of their estate planning. Currently, he is also spending significant time on charitable giving matters, community and private foundations, and transmission of family values to the next generations. Lewis is a graduate of the University of Virginia School of Law. His civic involvement includes service on the United Way, CHKD and ODU Educational Foundations, as well as several private Foundations. He is also Chair of the Endowment Committees of the Chrysler Museum and the Virginia Aquarium and the Distribution Committee of the Business Consortium for Arts Support. Lewis can be reached at (757) 624.3247 or

    The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2024.