Acquisitions USA

Will low US estate tax discourage bequests?

Fears that the President’s surprise concession means less for museums

President Obama signs into law the bill reducing estate tax

WASHINGTON, DC. President Oba­ma and the US Congress’s unexpected lowering of estate tax in December to 35%, with a $5m per person exclusion, in place for two years, has dismayed some who are concerned that lower rates may prompt less charitable giving, because the estate tax deduction for charitable gifts, seen as a powerful philanthropic incentive, will have less dollar value to donors.

Imagine a meeting with a fundraising officer for a major US museum, who is trying to persuade you to leave the institution $10m when you die. Under a 55% rate (which some had expected to be introduced), the fundraiser’s argument might go: if you leave the $10m to your kids, after tax the kids will keep only $4.5m. But if you leave it to the museum, because of the deduction at death which lets charitable gifts pass tax-free, the whole $10m actually goes to the museum.

Under the new tax law it costs you only $3.5m in tax to get an increased $6.5m to your kids. Will donors decide the museum doesn’t need the cash?

Such a disincentive is foreseen by some critics of the new law, such as Chuck Marr, director of Federal Tax Policy at the Center on Budget and Policy Priorities, a liberal Washington, DC think tank. “The value of the charitable deduction has been decreased,” he told us. In the negotiation over the new law, he says: “The Republicans put top priority on letting the wealthiest people in the country put huge amounts of money into trust funds for their heirs, including grandchildren and further generations. A month later, there is talk of cutting Pell grants for working class kids to go to college.” The new law also allows lifetime gifts of up to $5m, for example to long-lasting family trusts, free of any gift or transfer tax.

But others say the rich will keep on giving. Ralph Lerner, a New York art lawyer who counsels many clients whose net worth exceeds the new $5m exemption, told The Art Newspaper he doubts that the tax law change will have much impact on donors making gifts at death to charities. “The exemption isn’t large enough to discourage that,” he says, and people who own more than the exemption amount “will still want to take advantage of the income tax benefits of the charitable deduction during their lifetimes.”

The new tax law does provide income tax incentives for charitable gifts, including favourable terms in 2011 for making deductible gifts to charity from a retirement account, and a two-year allowance of unlimited itemised deductions for charitable gifts. As a result, “we see the new tax act as encouraging charitable giving,” said Brian Walsh, of the private wealth management firm Highmount Capital in Boston.

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