Tax Reform and Charitable Estate Planning: The Keys to Future Success | Sharpe Group
Posted April 10th, 2018

Tax Reform and Charitable Estate Planning: The Keys to Future Success

by Robert F. Sharpe, Jr.

Part two in a series on how the Tax Cuts and Jobs Act of 2017 may impact philanthropy and how to give effectively in light of the new laws.

Last month’s article focused on the expected impact, both positive and negative, the Tax Cuts and Jobs Act of 2017 could have on charitable giving, with an emphasis on current gifts of cash and other property.

This article offers an overview of how changes in federal estate and gift tax laws ushered in by the new legislation may influence the ways individuals incorporate philanthropy into their long-term estate plans going forward.


For all practical purposes, there have been no federal and very limited state estate tax considerations associated with charitable giving for many years. The new tax law further underscores that reality.

Last year, an individual could leave heirs up to $5.49 million free of federal estate and gift taxes. A couple could leave up to $10.98 million.

To put this in perspective, of the 2.7 million people who died in the United States in 2016, only 11,200 had estates worth more than $5.49 million. That means that 99.6% of Americans who passed away that year were not subject to federal estate tax under prior law. On top of that, some 65% of Americans live in states like California, Texas and Florida where there is no estate or inheritance tax.

While early tax reform proposals called for the complete elimination of federal gift, estate and generation skipping taxes, the final bill kept these taxes in place but doubled the exemption levels to $11.18 million for individuals and $22.36 million for couples. (See Treasury notice of final inflation-adjusted amount in Rev. Proc. 2018-18.)

According to the IRS, just 4,142 Americans died in 2016 with estates worth more than $10 million. This means the federal estate tax should not apply to roughly 99.8% of estates under the new law.

Given this lower tax burden, many individuals who would have faced estate taxes in the past may choose to use all or a portion of these tax savings to increase the amounts they devote to charitable use.

Why might this be the case? Consider William, 80, a widower with an estate valued at $12 million. In 2012, he promised a $1 million bequest to a charity he has supported over his lifetime—as part of an endowment campaign—in memory of his wife, Mary. His plans leave the balance of his estate to his two children after payment of any estate tax due.

Under prior law, his taxable estate would have been roughly $5.5 million ($12 million – $1 million bequest – $5.49 million exemption = $5.51 million). Assuming tax due of approximately $2.2 million, his children would have received about $4.4 million each.

Now suppose William passes away in 2018 with an $11.18 exemption amount. After satisfying the $1 million charitable bequest, his children would owe no tax on the remaining $11 million and would receive $5.5 million each. Why would William remove the charitable bequest when his children will receive an additional $1.1 million each due to the estate tax reduction? In fact, William could double his intended bequest to $2 million and both of his children would still receive $600,000 more.

Surveys of high net worth individuals reveal that 95% would keep their charitable commitments the same or increase them if their estates were not subject to tax. In a broadly circulated U.S. Trust Survey of High Net Worth Philanthropy (see Page 81), 72% said they would maintain their current level of giving through their estates, and 23% said they would somewhat or dramatically increase their charitable bequests.

This should come as no surprise to those who have worked closely with high net worth individuals, many of whom decide how much they would like their children or other heirs to receive, make provisions for payment of tax on that amount and leave the rest to charitable interests.

Golden age of split interest gifts?

Unlike estate taxes, the recent tax law made no changes in the tax treatment of charitable remainder trusts, charitable lead trusts, gift annuities and other so-called “split interest gifts.”

Millions of Baby Boomers are now entering retirement each year with unprecedented amounts of assets; they are becoming increasingly concerned about the long-term preservation and growth of their income and wealth in addition to satisfying philanthropic desires.

Irrevocable gifts completed today that feature immediate income tax benefits, increased income, a tax-free growth environment and other financial benefits may be more appealing to these individuals than gifts through estates that no longer offer tax benefits. Additionally, the irrevocable nature of such gifts can help protect donors in later years by walling off assets from those who may wish to prey on the elderly.

Help for non-itemizers

Consider the case of a retired couple whose deductible expenses do not meet the new standard deduction threshold of $25,600 for couples over 65. By periodically creating charitable gift annuities or making additions over time to a charitable remainder unitrust (CRUT), they could largely or completely satisfy their standard deduction requirement and make it possible to itemize other deductible expenditures.

CRUTs can also be structured in ways that result in a portion of annual payments being used to make immediate gifts to charity directly from the trust. For those whose ability to itemize gifts has been reduced, this offers another way to achieve the same practical result as full deductibility, much as in the case of those who are making use of the Charitable IRA provisions. In both instances, this income is not reportable by the donor and is thus comparable to being received and donated on a fully deductible basis.

Estate gifts from IRAs

In addition to current tax benefits from direct IRA gifts to charity, more donors of all ages may be expected to make gifts at death from their IRA and other tax-favored retirement plans (401k(s), 403(b)s and others). Whether or not a taxable estate exceeds new exemption levels, making charitable dispositions from retirement accounts while leaving other assets that will be received free of income tax to heirs will continue to be a tax-wise way to leave funds from one’s estate to charity.

Charitable lead trusts

Charitable lead trusts also offer a way for those who do not itemize due to higher standard deductions or Adjusted Gross Income limits to make significant gifts over an extended period in a way that is essentially the same as making fully deductible gifts. Again, this is because donors are not receiving the funds that are directed for charitable use from the lead trust.

While gift and estate tax considerations may not be as important when considering the use of lead trusts, the ability to make tax-free current gifts, combined with the desire to delay inheritances and make wise use of gift and estate tax exemption amounts, will continue to make this vehicle very attractive to certain donors.

More later or sooner

In summary, for many people, especially those with a lifelong history of philanthropic involvement, the recent changes in the law will result in more after-tax assets in their estates to be divided between heirs and charitable interests.

Others may find that accelerating bequests may result in immediate tax benefits and increased economic security in their later years.

In any event, donors may benefit from looking at the philanthropic aspect of their estate and financial plans through a more broadly focused lens following this latest tax legislation. ■

Robert Sharpe is Chairman and Chief Consultant for Sharpe Group.

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