A Slow Economy and an Estate-Tax Logjam Hamper Drive for Bequests

Charity efforts to win bequests and other estate gifts have slowed—coming to a complete standstill in many cases—because of the bad economy and a Congressional logjam over the estate tax.

What’s more, the amount many charities receive from bequests they were already promised has grown smaller, in part because the values of real estate and stocks have dropped so much. In many types of charitable trusts and other gifts that charities receive when a donor dies, the value of the donation comes from the sale of stock, homes, and businesses.

Real-Estate Decline

Fund raisers at the American Heart Association, American Cancer Society, Memorial Sloan-Kettering Cancer Center, and the Nature Conservancy, among other groups, say that it’s taking longer to get money from donors’ estates because executors can’t sell properties—and when they do, it is often at lower-than-desired prices.

At the Nature Conservancy, for example, the number of bequests held steady last year, but the amount the charity received fell by 20 percent from 2008.

The American Heart Association, which typically receives $75-million to $80-million in bequests each year, said bequest income declined by 14 percent last year.

“What is really affecting us is the decline in the real-estate market,” says Andrew Fussner, the heart association’s vice president of estate settlement. “We are probably looking at $5- to $10-million sitting out there right now where we are waiting for the estates to liquify” by selling real property. Charities, he predicts, “are going to see another year or two of flat or declining estate income.”

Estate-Tax Limbo

Meanwhile, in their efforts to secure new gifts, fund raisers and financial advisers who work with wealthy donors are frustrated that Congress let the estate tax expire this year—even though lawmakers had vowed to retain it and are now mulling over whether to reinstate the tax retroactively.

Beginning in 2001, federal law gradually lowered the estate tax each year, allowed it to lapse completely this year, and—unless Congress acts—the tax will be reinstated next year with much higher levies. If the law is allowed to stand, not only will people face tighter limits on what they can pass along tax free but also any remaining assets in their estate will be taxed at higher rates.

Before the estate tax expired, a person could transfer $3.5-million in assets tax free to heirs (or double that amount for a couple) at death, and the remainder of the estate was taxed at a maximum rate of 45 percent. But by making a charitable gift as part of their estate plans, donors could obtain a tax deduction and minimize—or even eliminate—the amount at which their estates were taxed.

But now, with no estate tax in place and its future unclear, wealthy donors who would otherwise include charitable gifts in their wills hesitate to do so because they cannot calculate how it will affect their estates.

In the past six months, three donors to Princeton University have pulled out of discussions over establishing charitable lead trusts, citing uncertainty over the estate tax, says Ron Brown, director of gift planning. (With charitable lead trusts, donors win tax deductions by transferring assets, usually $1-million or more, to a charity for a certain number of years; the assets are invested to provide income to the charity and are eventually returned to the donor or another beneficiary, usually the donor’s child or grandchild.)

“Estate planning and charitable gift planning have ground to a dead halt,” says Emil Kallina, a Baltimore lawyer who helps wealthy donors establish charitable trusts. “With the bad economy and uncertainty over the estate tax, clients are simply not moving forward. The other thing is that people lost a lot in the market.”

‘An Unmitigated Disaster’

Charities could face another problem because of the estate tax’s lapse: The wording of many estate plans links charitable gifts to the estate tax; now the gift could be deemed invalid if the donor dies before Congress takes action. What’s more, without the charitable deduction allowed under the estate tax, it could be subject to income taxes.

“On the donor side, it is an unmitigated disaster,” says Jill Dodd, a San Francisco estate lawyer who says she notified about 200 clients that a certain type of charitable remainder trust, known as a testamentary gift, will not be tax-exempt if the donor passes away this year with no estate tax in effect.

Ms. Dodd says that she was able to amend some charitable plans to add a provision stating that if the estate tax is absent at the donor’s death, the assets intended for a charitable trust would instead be given to an heir with a request that he or she set up the trust and receive a tax deduction. But, she says, “it was very complicated to figure out what to do. And it made people upset and angry.”

Charities say they are facing another, more immediate problem with the estate tax in limbo. Many executors and other representatives handling the affairs of people who recently died are unwilling to distribute any donations from their estate until it becomes clear whether estate taxes are owed.

At the Nature Conservancy, for instance, fund raisers have found “at least three big estates that are wary to put out distributions until the estate tax is settled,” says Beth Ridout, the group’s director of estate administration. “People are nervous.”