Arising from the Dead: Planned Giving with Death, Taxes, and maybe a Death Tax

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Arising from the Dead Planned Giving with
Death, Taxes, and (maybe) a Death Tax

• Edward J. McCaffery
• USC Law School
• Sonnenschein Nath Rosenthal LLP
• NCPG Conference
• Kissimme, Florida
• September 29, 2005

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Outline

• Status of Estate Tax Repeal
• Status of Charitable Sector Taxation
• Back to Basics
• Conclusion

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Outline

• Status of Estate Tax Repeal

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Status of Estate Tax Repeal

• What EGTRRA wrought
• Post-EGTRRA antics
• My current theory
• My best guess

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What EGTRRA Wrought
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Slouching towards 2010

• Throw Momma from train year
• Avoid your children year
• Charitable Sector pitch
• Give to us as life insurance!

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Post EGTRRA antics

• House and Senate vote multiple times for outright
  repeal
• Votes always come up short
• Recent move to compromise
• 15 rate?
• 3.5-5M exemption?

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My Current Theory

• Shakedown at Gucci Gulch
• Congress creates and perpetuates special interest
  groups so that it can be lobbied
• Note estate tax saga two-sided
• Wealthy families want repeal
• Insurance cos, financiers, and nonprofits oppose
• Good for Congresss business
• See McCaffery, Tax Notes, 11/15/04, and McCaffery
  Cohen, forthcoming, UNC Law Review

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My best guess

• 2010-2011 as written by EGTRRA will not happen .
  .
• . . . there will be more votes . . .
• . . . the new fight will be over a 15 rate . .
  .
• . . . the ultimate compromise will feature
• rates in 30s or 40s
• exemption of 2 to 5M
• . . . . that is, what could/should have happened
  in 2001

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Planned Giving without Death

• Some basic facts of the matter
• Polls rank tax reasons low among donors
• Lifetime giving is 10-12 times greater than
  bequests
• But . . . .
• Large donors matter
• Some definite price elasticity to charitable
  giving
• Under estate tax, 1 gift costs 50 cents
• Best quess is price elasticity gt income
  elasticity (Rakowski 1997)
• Lifetime giving reflects existence of estate tax
• And donors dont always admit tax motives . . . .
• . . . . perhaps even to themselves

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Planned Giving without Death

• Nontax reasons for planned giving (benevolence
  for any giving)
• Control
• Flexibility
• Certainty
• Income tax reasons to give
• (ideally, fair market value) deduction, today
• See Don Weigandt, Charitable Giving without Fear
  of Death, 2002 Major Tax Planning McCaffery and
  Weigandt, Tax Notes, Chronicle of Philanthropy
  2003

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Outline

• Status of Estate Tax Repeal
• Status of Charitable Sector Taxation

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Bad News, Part I Shakedown Redux

• Status of CARE/HR 7
• Key features
• Non itemizer deduction
• Non-penalized IRA rollover
• Facts
• President supports
• Senate approves CARE 95 5 (2004)
• House approves HR 7 408 13 (2004)
• Nothing happens
• More votes scheduled

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Bad News, Part II Dancing with the Devil

• Charitable sector under microscope
• Car valuation problem addressed in AJCA of 2004
• Grassley SFC Hearings focus on abuses in
  charitable sector, including 509 (a)(3)
  supporting organizations
• Charitable entities involved in listed tax
  shelters

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The wages of sin . . . .

• One recent poll found that 70 of people surveyed
  found it difficult to determine whether a charity
  is legitimate
• Better Business Bureau Wise Giving
  Alliance/Princeton Research Associates 2001

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Outline

• Status of Estate Tax Repeal
• Status of Charitable Sector Taxation
• Back to Basics

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The usual advice

• Response from those in the non-profit sector
  should be twofold
• 1. Ensure that favorable legislation is enacted.
• 2. Become familiar with the legislation so you
  can direct your marketing efforts to those who
  would be most affected by the law changes.
• Changes in Charitable Giving May be Imminent,
  Nonprofit World, May 1, 2005

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My advice . . . .

• Repent!
• Just say no
• Stop lobbying for new tax breaks
• Stop marketing to latest and greatest tax idea
• Get back to basics

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Back to Basics or, Keep it Simple, Stupid

• Most donors want to give
• Thats why theyre donors
• If they do not want to give, you shouldnt want
  to get from them
• Emphasize your mission and your credibility
• Let taxes be taxes

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Back to Basics, Part II The fundamental things
apply . . . .

• Death is salient
• Taxes are salient
• Simple devices like
• CRTs, CLTs, Charitable Annuities, Donor Advised
  Funds
• Work, for tax and non-tax reasons, and are
  time-tested

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The fundamental things . . . .

• Know your client!
• Devices for income now, charity later
• CRTs (with trust, pluses and minuses)
• Charitable annuities (no management!)
• Devices for charity now, family later
• CLTs (avoids estate tax if there is one)
• Ongoing philanthropy
• Donor advised funds better than private
  foundations (see Cafferata) or supporting
  organizations. . . . .

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Outline

• Status of Estate Tax Repeal
• Status of Charitable Sector Taxation
• Back to Basics
• Conclusion

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Keeping it simple

• Emphasize non tax aspects of planned giving
• Keep tax aspects simple, understandable, and
  legally uncontroversial
• Best tax-favored vehicles have non-tax benefits
• Just say no to lobbyists . . . .
• . . . . .and Congress!

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Contact

• Ed McCaffery, USC Law and Sonnenschein Nath and
  Rosenthal
• emccaffery_at_sonnenschein.com

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Arising from the Dead Planned Giving with
Death, Taxes, and (maybe) a Death Tax

• Edward J. McCaffery
• USC Law School
• Sonnenschein Nath Rosenthal LLP
• NCPG Conference
• Kissimmee, Florida
• September 29, 2005