The power of “no”

As December draws to a close, we know with certainty the Build Back Better (BBB) legislation will not be enacted in 2021. Senator Manchin’s recent “This is a no” comment suggests the likelihood of dramatic changes to the income and transfer tax for 2022 are also remote. While 2021 saw advisors and their clients trying to anticipate changes and respond accordingly, in the end, nothing happened. Vigilance remains appropriate in 2022 and future years if for no other reason than the principal of the federal debt exceeds the size of our economy. Congress also has tipped its hand about where and what might be taxed next.

The House bill for funding BBB was through higher tax rates for those with eight-figure incomes, including higher capital gains taxes. Those will be revisited should Senator Manchin and the Biden Administration agree to a scaled-down version of BBB with reliable funding.

There were some policy initiatives about ways of taxation that could have dramatically changed the economics of charitable giving had they been enacted. The proposed repeal of the step-up in basis to fair market at death likely will be revisited, as it is historically one of the most expensive “tax expenditures” under the Internal Revenue Code. The more likely result would be a retention of a step-up for those not exposed to the federal estate tax.

There were other policy proposals that would indirectly impact charitable giving: namely, Roth conversions. Congress appears to have on its radar the removal of backdoor Roth conversions and income limitations for mega Roth conversions. The tax bite of those conversions is currently mitigated with charitable planning.

While the global trend has been a reduction in the number of countries with wealth taxes, I think it will be re-examined. Congress has noticed for the wealthiest of the wealthy, the decision to pay income taxes on capital is voluntary because of the “realization” requirement under the Code. Additionally, personal consumption can be financed through borrowing, with the interest expense deductible to the extent of investment income.

The power of “one”

Through it all, charities continue to fulfill their missions in the second year of a pandemic. A recent tweet from the richest person on Earth caught my attention as being instructive about how to deal with your highest capacity donors. Elon Musk asked the World Food Program (WFP)¹ for a description of how $6 billion would “solve” the world hunger problem. He promised to sell his Tesla stock immediately if convinced.² While it is tempting to dismiss his tweet as a trolling of philanthropy given his relatively modest record of giving³, I see lessons for charity regarding their dealings with the highest capacity donors. While Elon Musk is not likely to be supporting your institution, it is likely yours has supporters or interested constituents with the resources to make a dent in the problems you are trying to solve.

Donors and potential donors want to be shown how their gifts will make a “transformational” difference. While “transformational gift” has become a bit of a cliché in many gift announcements, donors want some assurance of progress in ameliorating, if not solving, intractable problems like world hunger. Part of that assurance comes first from the creation of metrics measuring the success in solving a problem. It also comes from consistent stewardship reports highlighting both failures and successes.

By Professor Christopher P. Woehrle, JD, LLM

Endnotes

1. While WFP won the 2020 Nobel Peace Prize for its efforts in combating hunger and preventing hunger from being used as a weapon of war or conflict, the effectiveness of its aid is questioned. The Center for Global Development ranked it 40 out of 40 programs surveyed based on a number of criteria, including maximizing efficiency and transparency.
2. Musk, presumably, has wise counsel to point out the efficiency of gifted appreciated Tesla stock.
3. Though worth approximately a quarter of a trillion dollars, Elon Musk has “only” a billion in his foundation. His foundation as a percentage of his net worth is 4/10ths of one percent.