The estate tax phaseout process, which in 2002 began to reduce the number of individuals impacted by the estate tax, is scheduled to continue through 2010. At that time, the estate tax is due to be repealed, and it will be left up to Congress to decide whether that repeal is made permanent. With the election of a Democratic majority in Congress last November, some commentators have suggested that it is perhaps less likely that an estate tax repeal will actually occur in 2010, much less be made permanent. As a result, many development professionals who may have been planning to pursue their efforts in a world without estate taxes may now be wondering, “Is it time to return to the days of promoting charitable gifts as a way to avoid estate taxes?” Probably not, and here’s why.
IRS data reveal that of the 2.4 million people who died in 2005, only 18,431 were subject to estate tax. That means that 99.2% of people who died in 2005 did not owe estate tax. Of those subject to estate tax, 4,324, or 23%, left bequests to charity. It has been estimated that 8% of persons who die leave funds to charity. If that were the case, then the 4,324 persons who left funds from taxable estates represent just 2% of the 192,000 persons who left funds to charity. Put another way, it is estimated that some 98% of the estates from which charitable bequests are made are not subject to estate tax. The fact that 98% of those who left bequests to charities in 2005 did not own sufficient assets at death to owe federal estate tax may be especially interesting to those who are new to the world of charitable gift planning. This should come as no surprise, however, to experienced development professionals who know that most bequests in terms of numbers and as much as half of charitable bequest dollars have traditionally come from donors with smaller, non-taxable estates. These donors are most often older, often widowed or never married. Many are childless. Such persons typically leave relatively small amounts to friends and relatives, with the bulk of their estates left as residuary bequests to charitable interests. They receive no estate tax savings for their gifts under current law and most likely would not enjoy estate tax benefits even if the tax were reinstated at pre-2001 levels. Therefore, the typical charitable bequest donor must be motivated by factors other than estate tax savings.
Rather than promoting estate-tax avoidance as a way to motivate donors to include charitable provisions in their wills, perhaps a more effective approach in coming years, as in the past, would be to encourage constituents to make their estate plans and/or revise them as the case may be. As noted above, studies have shown that only about 8% of all Americans will actually include charitable dispositions in their estates. If, as data suggests, only half of the decedent population has a valid will or other estate plans in place, the entire 8% must come from the 50% with a will, meaning that some 16% of those who die with wills leave funds for charitable purposes. Therefore it appears that, for those organizations who educate and motivate their donors about charitable bequests and other testamentary gifts, there is considerable room and promise for significant growth in bequest income if they simply encourage their constituents to make plans for the distribution of their assets.
Keep it simple
It is very simple: If more people have wills and long-range plans, there will be more opportunities for charitable organizations and institutions to be included in these plans. Through consistent and effective communication efforts, development professionals can explain to donors, first and foremost, the importance of having an up-to-date will and other long-range plans, the peace of mind that comes from creating such plans, and the opportunities to support charitable interests through their estate and leave a lasting legacy for the future. Studies have shown that the reason some 97% of donors give for making a charitable bequest is the desire to support that charity’s mission (see the National Committee on Planned Giving’s report titled “Planned Giving in the United States 2000: A Survey of Donors”). Also, according to NCPG data, more persons said they learned about charitable bequests from an organization’s own published material than from any other source. Nonprofits must continue to explain why their particular cause should receive a portion of the donor’s life-long accumulation of assets. Likewise, emphasizing to your donors the need to make and/or update their wills and other estate plans could make the difference between your organization seeing increased bequest revenue or stagnant or declining charitable estate distributions.
Desire to give trumps tax benefits
The existence or lack of an estate tax may influence the amount and timing of some charitable bequests. But, for those who are charitably motivated, tax planning has not in the past and will not in the future be the main factor behind their giving. Charitable behavior as part of the estate planning process is motivated by a broad range of influences including politics, religion, emotion, and social theory, to name a few. Even if the estate tax is restored to pre-2001 levels, those who want their ultimate disposition of assets to reflect their devotion to the causes that have touched their lives will continue to make charitable provisions in their estates. As always, the mission of your nonprofit is what will likely matter most as donors decide, through their long-range plans, to elevate certain charities to the status of a family member or close friend by including them in their estate plans. Maintaining strong relationships with those older individuals who believe in your organization and the work that it does may be the key to success. One proven way to help strengthen such relationships is through ongoing and effective communications with your donors, in person and through other appropriate channels.