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Experts Say Charitable Trusts "Not Dead" This Year
According to an article in The Trust Advisor Blog, despite the estate tax hiatus, IRS records show steady creation of charitable remainder trusts, and experts expect a CRT boom ahead.
Every time the tax rules change, there’s plenty of fretting about the imminent death of charity, but it just never seems to happen. People who work with non-profit groups scoff at the idea that the expiration of the federal estate tax is making wealthy families rethink their wills.
“I don’t think we should get overly exercised about the estate tax,” fundraising consultant Phil Murphy told me. “While it does matter to Bill Gates, the estate tax never played a major role in most people’s philanthropic decisions anyway. It shouldn’t even be a consideration.”
As a result, Murphy says, charities he works with find it frustrating that Congress has yet to clarify the future of the estate tax, but they aren’t hurting for bequests either. According to philanthropic consultant Robert Sharpe, planned giving programs are doing record business for plenty of universities, hospitals and other non-profits. “When people are worried about the future, religious-based causes actually do better,” he told me. “Food banks do better; arts do worse.”
While New York attorney Martin Shenkman has seen the role of charitable bequests in many estate plans decline, it’s been less of a sudden crisis and more of a slow decade-long slide as the amount of assets exempt from the estate tax climbed from $650,000 in 2000 to $3.5 million last year.
“The histrionics are about ten years too late,” he told me. “There are very few families left out there for whom this would make any difference, and I have a feeling they’re not letting it affect their charitable donations. Besides, nobody really believes the tax has been repealed forever.”
IRS statistics confirm that estate tax policy hasn’t made much of a dent in philanthropic activity. Factoring out extremely wealthy families with $20 million or more, only about 20% to 25% of all the estates that paid estate tax between 2001 and 2007 also made charitable bequests; while this represented a “slight downward trend,” it’s not exactly a jump off a cliff.
The “Comfort Food” of Planned Giving
Shenkman says everybody he talks to is a lot more worried about Congress raising income tax rates down the road. If that happens, he wouldn’t be surprised to see charitable remainder trusts—which let people give money or appreciated property and get both an income stream and a tax deduction—start making headlines. “As income tax rates start to go up, they become enticing again,” he told me.
He’s not alone. Springfield, Illinois estate planner Vaughn Henry also suspects charitable remainder trusts will be back “with a vengeance” next year, but as far as he’s concerned, the main sizzle isn’t the one-time income tax deduction but the way these trusts (and the income they throw off) ignore capital gains.
However, Henry isn’t really a fan of exaggerating the tax advantages of these trusts or any other philanthropic instrument. “There’s not much point on selling somebody on doing something for pure tax reasons,” he explained. “You cannot make money giving money away, and so people have to understand that they’re ultimately giving something away. The tax benefits are at best a sweetener.”
Still, as far as “sweeteners” go, Henry adds, the income stream that charitable remainder trusts—and their cousins, charitable gift annuities—provide make them pretty attractive to middle-market donors who have the money to spare but still want the added income while they’re alive.
Robert Sharpe agrees that the real appeal here is to people who probably haven’t been worrying about the estate tax anyway, especially in a volatile economic environment. “Five years ago, these are people who might’ve made an outright gift to charity, but now they’re a little more worried about the future,” he told me. “In difficult times, the average wealth level of people who do charitable remainder trusts goes up.”
There are people out there who recommend grantor retained annuity trusts instead, but Vaughn Henry says that’s mostly talk at this point. In any event, charitable trusts are already a robust business. According to the IRS, the number of charitable trusts expanded 37% between 1999 and 2008, the most recent year for which data are available. Most of that growth was at the lower end of the market; as of 2008, 69% of these trusts were worth under $500,000, and only 15% of them contained over $1 million in assets.
The income stream is why fundraising coach Phil Murphy calls these philanthropic vehicles “the comfort food of planned giving.” He says some of his non-profit clients are actively courting them, but warns that a donor who’s counting on making a big posthumous gift can still deplete the trust if he or she lives a long time or picks an aggressive return rate, leaving the charity with nothing.
“There’s really really no guarantee that the trust won’t end up cannibalizing itself,” he explained. “There’s nothing wrong with them, but if the payment rate is too high, they can come back to bite the donor like the creature in Alien.”
Scott Martin, contributing editor, The Trust Advisor Blog. Steven Maimes contributed to the research and editing. Copyright 2010 The Trust Advisor Blog. All rights reserved. Used by permission.