Donors Wrestle With Uncertainty Over Tax Proposals and Troubled Economy

A California donor might speed up his real-estate gift to a hospital, worried that if capital-gains taxes are raised under a new presidential administration, he would be less well off at the end of the transaction.

In Texas, a donor is slowing his plans to create a multimillion-dollar trust to benefit a university until he has a better sense of how federal estate taxes might fare after the White House changes hands.

Fund raisers typically encounter those kinds of stop-and-go decisions, especially as the shaky economy causes many donors to rethink their giving. But this year has been a bit rockier as fund raisers, donors, and their advisers have thrown a new consideration into the mix: how the tax plans laid out by Barack Obama and John McCain during their campaigns might affect giving.

“A good planner always goes through a checklist with donors of all the things that will impact the gift,” says James F. Normandin, president of the Memorial Medical Center Foundation, in Long Beach, Calif. “Taxes are always on that list, but in an election year, or when the winds of change are upon us, what will happen with taxes comes more to the forefront because they become a bigger question mark.”

Capital Gains

Tax policies espoused by the two presidential candidates vary widely. Mr. Obama, for example, supports raising income taxes for the wealthiest Americans and increasing capital-gains taxes to 20 percent, from the current 15-percent rate.

Mr. McCain has advocated a reduction in income taxes for everyone, no change in the capital-gains tax rate, and a much lower estate-tax rate than the one Mr. Obama has promoted.

No matter who is elected, the odds are the tax platforms of presidential candidates will not have an easy time getting passed into law exactly as they have been articulated on the campaign trail. And, with other looming financial issues to deal with, the winning candidate may even end up proposing different approaches.

In any case, observers of charitable giving say, how, or to what degree, tax policy influences charitable donations is a tricky subject that remains up for debate.

Robert F. Sharpe Jr., a fund-raising consultant in Memphis, sums up one of the major differences of opinion this way: The liberal view is that higher taxes give people more incentive to make contributions because the higher the tax rate the less it costs to make a tax-deductible gift.

For example, a gift of $100,000 effectively costs $70,000 at a 30-percent tax rate, and $60,000 at a 40-percent tax rate. The conservative view is that higher taxes give people less incentive to give because they have less money in their pockets.

‘Taxes, Schmaxes’

For many fund raisers and donors, the uncertainty about what may happen under a new president is nothing unusual, since tax-policy changes may always be around the corner, regardless of a changing guard in the White House. For others, the coming election has inspired speculation, and, probably more often, the need for patience.

Concern over what next year’s tax rates may look like, though, has recently taken a back seat to bigger worries about the economy in general.

“Taxes, schmaxes. It’s the economy, stupid,” says Conrad Teitell, a Connecticut lawyer who focuses on charitable giving, borrowing a phrase Bill Clinton used to get elected in 2002. “Of course there are tax considerations any time someone is dealing with decisions about their assets, but the overriding factor now is the economy.”

Laura Hansen Dean, executive director of gift planning at the University of Texas at Austin, agrees.

“It’s the talk about a recession, a depression, the health of the American economy that has people’s attention, that’s making everyone nervous,” she says. “Ultimately people have to be comfortable with getting rid of their assets, and we are hearing from people that they are just not comfortable with the economy the way it is now.”

Fund raisers, Ms. Hansen Dean says, have to continue plugging away with donors to find the best balance between their desire to give and what they believe they can afford. It is in working out those details, she says, that taxes come into play.

“It’s no better or worse for us if estate taxes go up or stay the same, or if the capital-gains tax goes away or way up,” says Ms. Hansen. “It just changes the reality of what we have to work with.”

An increase in the tax rate on capital gains, for example, would give donors an incentive to donate real estate or stocks that have risen sharply in value because people will want to avoid a higher tax rate, she and other charity officials explain.

By the same token, if income tax also goes up, planned gifts that return annual income to the donor, like charitable remainder trusts or gift annuities, are also likely to gain popularity.

Not only would donors avoid the higher capital-gains taxes, but their appreciated asset would provide them earnings at a time when higher income taxes are taking a bigger bite out of their wallets.

Wealthiest Donors

The discussion and predictions about the candidates’ tax policies largely revolve around charities’ biggest donors because they are the ones who would be affected most by the proposed rate changes. Mr. Obama’s income-tax increase, for example, is designed to cover only Americans who earn $250,000 or more each year.

Less well-off donors might be affected instead by changes in the rules that govern contributions made directly from individual retirement accounts and whether people who do not itemize on their tax returns would be allowed to deduct charitable gifts.

Donors focusing on what the candidates’ positions are on the estate tax would be among the richest of the rich.

Mr. Obama proposes to keep the current 2009 plan for the estate tax, which would allow for exemptions from the tax until the size of the estate exceeds $3.5-million for an individual and $7-million for a couple.