Phaseout of Estate Tax Will Make It Tougher to Raise Funds Over Long Term, Experts Say

Even before President Bush had signed the $1.35-trillion tax-cut bill into law, and the Treasury Department began getting ready to send income-tax rebate checks to taxpayers, fund raisers were coming up with ways they could use the law to drum up donations.

At least one group already is trying to persuade people to donate the rebate — an amount of up to $600 for married couples — that they will receive under the law.

Third Millennium, a nonprofit group in New York that seeks to ensure that the views of people in their 20’s and 30’s are included in national policy debates, has set up a new Web site, http://www.donaterebate.org, to encourage rebate donations. “Tens of millions of people weren’t expecting these rebates,” says Richard D. Thau, the group’s president. “This is basically ‘found money’ for people. I think we can encourage some of them to give it to charity.”

Challenge for Charities

Many fund raisers, however, are worried that the rest of the new legislation could significantly hurt efforts to attract donations. In particular, new limits on the number of people who have to pay estate taxes — and the amount they have to pay — could force many charities to make big changes in the approach they use to encourage bequests and other donations of substantial size.

Under the law, the amount of an estate that is exempt from taxation will rise to $1-million next year from the $675,000 threshold now in place. That figure will rise gradually to $3.5-million in 2009. The rate at which estates are taxed also will gradually decline. In 2010, the estate tax will be repealed, but for just one year, since the entire tax-cut legislation expires in 2011.

Charity fund-raising experts predict that the estate-tax law, combined with overall reductions in income-tax rates and other changes, will cause some people to see fewer tax-savings reasons to give.

In the short term, some charities could see an increase in gifts, as taxpayers take action to adjust to the new law. Some people may decide to give more this year than they had planned, in part because of changes in tax rates that produce greater tax savings from giving now than will be available in the future. For people in the top tax bracket of 39.6 percent, for instance, a $10,000 gift now produces a tax break of nearly $4,000; that rate will fall in stages to 35 percent by 2006, which means that the tax savings for the same gift will fall to $3,500.

But in the longer term, charities will face a tougher time when they stress the tax benefits of making a gift.

The loss of ability to promote tax breaks will probably be hardest for charities that promote bequests as a way to escape estate taxes. Some organizations will be hurt harder than others, in part because of the motivations of their donors, fund-raising experts say.

“If people gave paintings to a museum because they didn’t want to pay the estate tax on the paintings, a museum is going to lose some bequests of artwork,” says Robert F. Sharpe Jr., a Memphis fund-raising consultant. “But if someone is giving to the cancer society because their child died of cancer, that person won’t give less because of the law — they’ll probably give more.”

Mr. Sharpe says the reduction in the estate tax means that charities should emphasize planned gifts that can offer tax and financial benefits during a donor’s lifetime.

But he and others say that because the law doesn’t completely repeal the estate tax until 2010, some tax advantages remain for charitable gifts made through estates. The key, they say, will be making sure that donors realize that.

“People who read the headlines are saying, ‘I don’t have to pay an estate tax. I can leave everything to my kids,’ or ‘I don’t need an estate plan at all,’” says Stephan R.Leimberg, a Bryn Mawr, Pa., lawyer.

Even donors who realize that the estate tax is only reduced over the next several years might be put off by the expense and difficulty of developing an estate plan under the new law, says Vaughn W. Henry, a planned-giving consultant in Springfield, Ill. Because the cut is being put into place gradually, donors who want to stay on top of the changes will need to review their gift plans every few years, and also will need to develop alternative plans in case Congress decides to repeal the estate tax permanently, or to cancel the repeal before it takes effect.

Getting in Touch With Donors

As a result, donors may decide to wait and see if the situation changes before they draw up any plans. If that happens, the number of people who make planned gifts will drop, Mr. Henry predicts, because those gifts are usually made as part of an estate plan.

Still, the law provides a good excuse for charities to get in touch with their donors, Mr. Henry says. “Even if we don’t know the answers, it gives us a good reason to contact them and talk about what’s going on,” and perhaps help them make other types of gifts that will not be affected by changes in the estate tax, he says.

Some charities see the diminution in the estate-tax benefits of giving to charity as a silver lining for fund raisers.

Reine Shiffman, executive director of the Sister Kenny Foundation in Minnetonka, Minn., says that because of the estate-tax break, too many charities have neglected to stress the nonfinancial advantages that donations can have, both for the charity and for the donor.

Now that taxes won’t provide as great an incentive to give, she says, “in order to get bequests, we have to start developing better relationships with people.”