New Tax-Cut Law Could Discourage Giving

By Elizabeth Schwinn, Ian Wilhelm, Grant Williams,
and Brad Wolverton

Some of the tax cuts in the law President Bush signed last month could discourage certain types of charitable gifts, some planned-giving experts believe.

The law cuts the tax rate on capital gains to 15 percent, from 20 percent, and accelerates cuts in income-tax rates that were to have occurred over the next three years. The lower income-tax rates will now take effect this year, with the top tax rate falling from 38.6 percent to 35 percent.

Vaughn Henry, a planned-giving consultant in Springfield, Ill., who advises wealthy clients on estate planning, says income and capital-gains taxes influence his clients’ charitable gifts, particularly their creation of trusts. “Charitable remainder trusts are often initially motivated by the capital-gains tax,” Mr. Henry says, as well as by a client’s desire to give to charity.

The problem is that such trusts are expensive to establish and cost money to maintain, Mr. Henry explains. When capital-gains taxes are high, people have an incentive to donate stock or property that has increased substantially in value from the time they acquired it so that they can get some benefit from the appreciated property without paying the full capital-gains tax. Under such a scenario, most or all of the fees associated with a gift to a charitable trust are covered by money that would otherwise have gone to the federal government. But if capital-gains taxes are low, donors would essentially have to pay the fees out of their own pocket, since they would have the option of keeping more of the financial gains themselves.

“To what level does that tax have to fall before a trust is considered too burdensome for the fleeting tax benefits generated?” Mr. Vaughn asks.

What’s more, the fact that income-tax rates have been lowered for all Americans means people who want to lower their tax bills have less need of charitable deductions to achieve that goal, he says. “When income-tax rates go down, the charitable deduction has slightly less value,” he says.

Bill Zook, a planned-giving adviser in Seattle, called the impact “pretty modest.” The tax changes “don’t foreclose any particular gift option, they just make them a little less attractive,” he said.