September 6, 2010 | Read Time: 8 minutes
Last month, a wealthy donor visited Phillip Adcock, a senior fund raiser at the University of Alabama. Convinced that the federal government would soon raise his taxes, the donor wanted to talk about a way to protect his assets while also fulfilling his charitable commitments.
Now the donor plans to add $100,000 to a scholarship fund he created in memory of his wife. Altruistic reasons aside, the donation is financially savvy. He will use the charitable deduction to counter the effect of taking as much money from his tax-deferred retirement account as he can this year, while tax rates are relatively low.
Mr. Adcock and other fund raisers expect to see more and more donors making contributions prompted by tax considerations in coming months. As a result, they expect a surge in large gifts this year and next.
Federal lawmakers are considering at least half a dozen tax changes, and most would have the effect of increasing taxes on wealthy people in 2011.
The tax changes are one reason Congress has been in gridlock, however, and the outcome might not be determined until after the November elections—just as the busiest part of the giving season begins.
It’s not just Capitol Hill that donors and fund raisers are watching. New York last month cut the charitable deduction in half for its wealthiest residents starting next year, a move other states may emulate.
Usually uncertainty about taxes or the stock market leads donors to delay making large gifts and other big financial commitments, says Sarah C. Libbey, president of the Fidelity Charitable Gift Fund.
But this year, she says, “uncertainty around taxes leads to more opportunity for increased charitable giving. This could be the busiest year-end in quite a while.”
A survey of more than 500 financial advisers to affluent people released by Fidelity last month found that 87 percent expect their clients to be subject to higher income taxes in the next 12 to 18 months.
Nearly half the advisers said their clients will maintain their charitable giving during that period, and more than a quarter predicted that clients will expand their charitable contributions to offset tax increases.
The challenge for fund raisers seeking to take advantage of the uncertain tax climate is that when it comes to deciding whether to give this year or next year, “there is no one-size-fits-all,” says Laura Peebles, a Deloitte & Touche accountant who advises wealthy clients on charitable issues. “The only rule of thumb is to run the numbers, because each individual is different.”
Estate Tax
One likely tax increase on the minds of many affluent donors is the estate tax.
The tax was gradually phased out over the past decade and this year is not in effect at all. It will automatically go back to 2001 levels next year unless Congress acts to stop the change. That means the estates of wealthy people who die next year could lose more than half of the assets they leave behind to taxes.
At the University of Alabama, Mr. Adcock is working with an elderly donor who decided to give the university a collection of rare historical documents worth $12-million this year because he is convinced that the estate tax is certain to be re-enacted.
By donating his collection now, Mr. Adcock says, the donor removes an item from his estate that would probably be heavily taxed at his death, and he also receives a charitable tax deduction this year.
If he had kept the collection, the estate tax would force his family to sell the documents to pay the taxes owed when he dies, or scramble to come up with the money.
“The family told me they are enormously relieved,” says Mr. Adcock.
Giving in Advance
Large gifts prompted by tax considerations are most likely to go to charities a donor already supports. But some new organizations may also benefit.
Andre Donikian, an Indianapolis planned-giving consultant, says he is recommending that some affluent donors who make cash gifts every year establish a donor-advised fund in 2010, especially if they will have a big infusion of income this year. Many donors are in that position because they want to take money from retirement accounts or sell stock and other assets now while tax rates are low.
Setting up a donor-advised fund, Mr. Donikian notes, will provide them with an immediate tax deduction to offset taxes on their increased income this year, and they can use the fund to give the same amount they normally would over the next few years—either to charities they already support or to new causes.
“Several high-net-worth people I know are doing this,” Mr. Donikian says.
Transfers to IRA’s
Federal tax increases next year are not the only motivation for making a large contribution this year.
Some wealthy people will want to give because they are taking advantage of a measure that took effect this year. It allows wealthy people to shift money from a tax-deferred individual retirement account into a Roth IRA.
Roth accounts are created with after-tax money and are subsequently used to provide tax-free income when a person retires.
While that is a financially smart approach for some affluent people, they will face a big tax bill on the money they convert to a Roth IRA.
At Stanford University, an article about how donations can reduce the cost of a Roth IRA conversion in an alumni newsletter to donors aged 50 and older has sparked some of the university’s donors to consider gifts of $10,000 or more—in some cases over $100,000—to offset taxes on their Roth conversion.
Chris Yates, Stanford’s director of planned giving, says he expects a handful of Roth-related gifts to be completed in the final quarter of 2010.
Stock Advice
The economic and tax climate is prompting more and more donors to show an interest in making gifts of appreciated stock and real estate, fund raisers say.
Many donors have benefited from the recovery of the stock market in the past 18 months. Donors who contribute those stocks not only win a tax deduction but also avoid the capital-gains tax they would owe on the amount by which their stock has grown.
Looking at a possible increase in capital-gains taxes next year, many donors are likely to find that giving appreciated stock in 2010 is the best way to fulfill a charitable commitment, says Robert F. Sharpe, a Memphis consultant.
More than half of the donations to the Fidelity Charitable Gift Fund in the first six months of this year were made with donated stock, up from 32 percent during the same period last year.
But many donors don’t understand the benefits of donating appreciated stock, says Mr. Sharpe, so fund raisers may need to be assertive in explaining the rules.
“If you get a check for $10,000 this year, you might want to call the donor and ask if they have stock that has appreciated in value, because it may be better for them to give that and tear up the check,” Mr. Sharpe says.
He says one of his colleagues recently talked to a fund raiser about a donor who sold appreciated stock to make a $1-million gift this year, but the donor now owes more than $100,000 in capital-gains taxes.
“By the time they found out, it was too late,” says Mr. Sharpe. “Don’t assume everyone knows the basics.”
Giving a House
For many affluent donors, the struggle is how to give at a time when assets they count on to pay their yearly bills have shrunk in value.
For some of those donors, particularly those of retirement age, fund raisers and financial advisers say it may be smart to fulfill charitable pledges with a home or other asset this year. Some charities offer older donors a deal in which they can give their house but live there until they die or move away. After that, the nonprofit usually sells the property.
“I have handled more gifts of property over the last two years than in my entire career,” says Mr. Adcock at the University of Alabama.
Many donors, he says, “are living on less income because of the investment climate, but they have these assets. People give what they have.”
Mr. Adcock says his institution has received two property gifts in the past 60 days. One, which the university has already sold to fulfill an outstanding $200,000 pledge, is a home that the donor had bought as an investment property but no longer wanted to manage.
The other property is a house in an affluent neighborhood that the university has just put on the market, donated by a couple who moved into a retirement community.
“They just made the decision to give us the home,” Mr. Adcock says of the gift. “It is the asset they have, and they are not using it. We will have no trouble selling it.”
Creative Contributions
Donors may be able to make large gifts with other assets this year.
For example, Mr. Adcock recently accepted a 1950 Ferrari that the donor had bought years ago for $1,500. The car, which has an illustrious racing history, sold for $1.2-million.
Following the donor’s wishes, the proceeds will provide scholarships to students from the high school where the man’s father worked as a custodian.
“People forget that giving isn’t just all about money,” says Robert E. Carter, vice chairman of Archimede Philanthropy Partners, a New York consulting company that advises nonprofit organizations and wealthy individuals on big gifts.
“The good news about hard times,” he says, “is that they foster creativity.”
