New Tax Rules May Result in More Charitable Giving, Experts Say

A 92-year-old donor last month gave the Georgia Institute of Technology $500,000 to set up a charitable remainder trust. Georgia Tech will invest the money to provide an income for the man and his partner, an 82-year-old woman. When she dies, the institution gets whatever is left.

Two other Georgia Tech donors are creating similar charitable trusts that will provide assets to the institution when they die.

The new trusts are the welcome result of changes Congress made to the estate tax in December, coupled with the economic recovery, says Peter J. Ticconi, Georgia Tech’s senior director of gift planning. “I haven’t talked about a charitable remainder trust in three years,” he adds. “The door has swung open again, and that’s encouraging.”

Like Mr. Ticconi, other fund raisers are expecting that charitable trusts, gift annuities, and other large gifts will get a significant boost this year and next year. Here’s why:

• Changes in the estate tax have increased the maximum amount that wealthy people can give to relatives, friends, and others tax-free in 2011 and 2012. That potentially makes more money available for charitable gifts.

• Congress has extended a provision that enables people age 70 1/2 and older to give charities up to $100,000 tax-free from their individual retirement accounts in 2011 and 2012.

• Historically low interest rates now make certain types of donations, such as charitable lead trusts—which produce an income for a nonprofit organization for several years before the assets are returned to a donor’s heir—more attractive for some wealthy people. Low interest rates mean more money can ultimately pass to a donor’s heirs through such trusts. The changes Congress made in the estate tax—allowing up to $5-million per person to be exempt from any levies—are controversial among charities, because some people think they will decrease incentives to give.

While that is debatable, fund raisers and tax advisers say what is important is that the new law gives wealthy people a good idea of what to expect in the next two years. The estate tax has sparked partisan feuds over the years and was in limbo last year as Congress could not agree how to handle the levy.

The new certainties were thrown into flux last week when President Obama said he thinks the estate-tax exemption is too high and he will seek to change the limits for 2013 and beyond. He also proposed limits in the value of charity write-offs and other deductions that wealthy people can take.

Nonetheless, fund raisers and tax advisers say the possibility of change in 2013 is even more reason that many wealthy people may want to consider new gifts this year and next.

“There is no question that the estate-tax exemption has opened up entirely new opportunities for planning by my clients,” says Emil Kallina, a Baltimore lawyer who advises wealthy people on charitable giving. “There is extreme interest in re-examining their estate plans. Everyone I talk to wants to do it. The brakes are off, and clients are saying, What are my options now?”

‘More to Work With’

The changes in the estate tax for the next two years are substantial. Not only did Congress increase the amount that could be kept tax-free from 2009 levels, it also reduced the tax rate from 45 percent to 35 percent.

And it’s not just the estate tax that allows more income to be transferred tax-free. In the past, people could give up to $1-million in their lifetimes to children or other heirs without paying a gift tax; now they can give up to $5-million tax-free over a lifetime. (However, if they do, that reduces how much they can leave tax-free in their estates when they die.)

Fund raisers and charity advisers say the new change means wealthy people will have more flexibility, and perhaps more money they can give to nonprofit causes.

“Taxable rates are lower now, and it gives you more to work with,” says Laura H. Peebles, a Washington financial adviser who helps wealthy clients with charitable plans.

Limited Time

Fund-raising advisers warn charities that because the new tax changes are only in effect for this year and next, they need to reach out soon to affluent older donors.

“People have this two-year window in which they are trying to figure out how to transfer assets,” says Robert F. Sharpe Jr., a Memphis planned-giving consultant. “Nonprofit organizations can convey that now donors can do more for their heirs and the charities they care about.”

But to communicate effectively with donors, fund raisers need to understand how the estate and gift taxes have been changed and at least be conversant in the basics of how charitable trusts work, says Mr. Sharpe.

“If the donor mentions a lead trust at another institution and asks if the fund raiser’s institution can do the same thing, and the major-gift officer looks at the donor like a deer in headlights, there is a lost opportunity.”

To deal with that issue, some charities are now asking fund raisers who specialize in seeking planned gifts to train those who seek cash donations.

At the University of Minnesota Medical Foundation, in Minneapolis, for example, “we have just started a strategy for how to inform our development staff about what the new estate tax looks like,” says Holly McDonough Gulden, associate vice president for development.

To that end, the foundation has held two brown-bag lunches for major-gift fund raisers to learn about the estate tax and IRA law.

The sessions at the foundation are part of a bigger effort, now in its second year, of uniting planned giving and other fund raisers to seek “blended gifts,” which combine outright gifts with a bequest or other planned gift, says Ms. Gulden.

Fund raisers get joint credit for such contributions, regardless of whether they arranged the planned gift or the outright donation, “so there is no competition,” she says.

As a result, she adds, “more and more of our goal, which is $13-million for planned gifts this year, is being met by development officers whose primary focus is not planned gifts.”

Retirement Accounts

Other institutions have started to reach out to their older, wealthier donors. As a result, the University of Alabama received some $400,000 in IRA gifts in January alone, on top of another $2.6-million given since tax-free transfers were first allowed in 2008.

Conrad Teitell, a lawyer who specializes in planned gifts, was invited to speak this month at the Salvation Army’s southern division, in Sarasota, Fla., where he met with 20 to 30 donors. One of them had donated more than $250,000 to set up gift annuities, mostly to benefit the Salvation Army.

Gift annuities, says Mr. Teitell, are very attractive to older people now. They provide guaranteed income for the donor and a higher percentage return than people can earn with a money-market account.

At Georgetown University, fund raisers have sent a mailing about charitable lead trusts to high-net-worth donors.

The new higher estate-tax exemption, along with low interest rates, provides an attractive way for donors to set aside money that their children or grandchildren will eventually receive, while providing money to a charity until then, saysJeff Comfort, Georgetown’s executive director of planned gifts.

“There is a tremendous opportunity to look at charitable lead trusts now, particularly for those who want to teach their kids about philanthropy and keep them involved in learning about the impact of the trust’s annual distribution,” says Mr. Comfort. “This is values-based estate planning, and the charitable lead trust is one of the best ways to accomplish this.”

Anyone who responds to the Georgetown mailing will get a free copy of a book about how families can pass their values on to their children and grandchildren through philanthropy.

One reason that charitable lead trusts have added appeal for donors now: “The economy is still hinky and people are reluctant to part with assets permanently,” says Anne Morgan, a fund raiser at Northern Arizona University, in Flagstaff.

The university is now planning a series of seven “make a will” seminars in March that will focus on estate planning and provide information on the new estate tax, IRA gifts, trusts, annuities, and bequests. At the seminars, designed for people 65 and older, the university will serve refreshments and set up appointments to visit people who want to learn more.

“This is an exciting time,” says Ms. Morgan. “Nonprofits are getting better at communicating what is possible, and people get excited about the gifts they can make with these vehicles.”