With a broad tax overhaul taking shape in Congress, charity and foundation membership organizations have been outspoken in their efforts to beat back proposals they see as a threat to charitable giving. But they have been less vocal about one item, the repeal of the estate tax, which could significantly reduce donations to nonprofits.
Some policy advocates for nonprofit groups say that while they support the tax, there are more important battles to fight. Hadar Susskind, the Council on Foundations’ senior vice president for government relations, said that with both chambers of Congress being led by Republicans who support getting rid of the tax, preserving the tax is a tough sell.
“If you think you’re going to convince a Republican member of Congress not to repeal the estate tax, frankly you’re wasting your time,” he said.
Nonprofits and their lobbyists have not mounted a full-throated opposition campaign, as they have done in response to, for example, calls in Congress to kill the nonprofit politicking rule. One good reason: They could work themselves into a difficult spot if they push hard to keep a tax in place that is opposed by some of their wealthiest donors.
While foundations and charities want to steer contributions to a good cause, they also are sensitive to the people’s right to manage their own wealth, says David Scullin, president of the Communities Foundation of Texas.
“Do I think we could make a greater use of the funds? Do I believe that in my heart? Yes,” he says. “I’m just a big believer in rights, so I’m reluctant to get out [in front] on that.”
A Powerful Incentive
Currently, estates of more than $5.45 million for individuals and $11 million for couples are taxed at a top rate of 40 percent. To avoid the tax, people often include charitable gifts in their estate plans. A Congressional Budget Office study in 2004 found that the tax is a powerful incentive. Repealing it, the study found, would reduce charitable giving by as much as 12 percent.
The CBO hasn’t weighed in since, but many researchers agree that the estate tax serves as an incentive for people to earmark money for charity upon their death. Over the course of a decade, repealing the tax would cost the U.S. Treasury about $269 billion, according to an estimate from Congress’s Joint Committee on Taxation. In 2015, the Internal Revenue Service received about 12,000 estate-tax filings, netting just more than $17 billion in tax payments, a small portion of overall tax revenue.
Opponents of repealing the tax think that without it, the gulf between the superrich and other Americans would deepen. Estate-tax critics, largely Republicans, have long derided the levy as a “death tax,” arguing that people should be free to control how their assets are parceled out upon death without the government taking a cut.
Rather than rallying in opposition to an estate-tax repeal, nonprofit leaders like Mr. Susskind have concentrated their efforts in areas where they see a better chance of success. Both the Trump White House and House Republicans have, for instance, proposed doubling the standard deduction. Doing so, charity advocates argue, would reduce gifts to charity: With a larger standard deduction, fewer people would separately itemize gifts to charity on their tax returns.
To counter that, the Council on Foundations, Independent Sector, the Philanthropy Roundtable, and other groups are pushing for a “universal charitable deduction” that would allow taxpayers to write off charitable gifts on their tax forms, without having to itemize them separately.
Alarm Bells
That’s not to say nonprofit lobbyists don’t have a position on the estate tax. Independent Sector, a membership organization of nonprofits, for example, has called for Congress to return the estate tax to its 2009 shape, with a $3.5 million exemption and top rate of 45 percent.
Doing so, argues Allison Grayson, the group’s director of policy development, would help maintain a flow of bequests to nonprofits. But the proposals to double the standard deduction set off alarm bells that needed to be addressed, she says, and that’s where the group is concentrating its efforts.
“Policy makers may not have fully grasped how these provisions would impact charitable organizations,” she says. “We wanted to make sure we were educating on issues that they may not be fully aware of first,” before reinforcing the group’s position on the estate tax.
By mostly focusing elsewhere during the tax debate, nonprofits are missing an opportunity to save a key tax incentive for charitable giving, says Aaron Dorfman, president of the National Committee for Responsive Philanthropy.
Jettisoning the tax will help extend dynasties of family riches and exacerbate wealth inequality, he says. Many Republican members of Congress won’t be persuaded by those arguments, according to Mr. Dorfman. But he believes that lawmakers would warm to the issue if constituents reminded them about hospitals, schools, and parks in their districts that were built as a result of charitable bequests.
Mr. Dorfman is trying to pull together a coalition of estate-tax supporters to make that case. Given the uncertainty surrounding the tax debate on Capitol Hill, he figures he’s got a good shot at changing some votes.
“Nothing is a done deal, especially in this unpredictable environment, so we ought to put up a fight,” he says.
Differing Views
The estate tax is either a hated confiscation of wealth at the time of death, or an invitation to become more philanthropic, depending on who’s being asked.
Some agree with Bill Gates. The Microsoft co-founder, who has pledged to give away most of his wealth before he dies and would still have enough to provide a huge inheritance to his children, addressed the issue in a 2014 blog post.
“I’m a big believer in the estate tax,” he wrote. “Letting inheritors consume or allocate their capital disproportionately based on the lottery of birth is not a smart or fair way to allocate resources.”
Like many other nonprofit executives, Craig Showalter, president of the Wyoming Community Foundation, believes that people make gifts to charity because of a personal motivation to help others. But, he says, the estate tax provides an incentive for those people to give more and for people who have not been philanthropic during their lifetime to plan for charitable gifts as part of their estate planning.
“They’re taxed so high that it’s a no-brainer,” he says.
Many rich people, however, don’t give to charity to dodge the estate tax, says Jeffrey Zysik, chief financial officer of DonorsTrust, which manages donor-advised funds. Instead, some wealthy donors prefer to give to charity because they believe that leaving too much to their children will make them lazy.
While he doesn’t fear that an estate-tax repeal would cause a big, lasting decline in giving, Mr. Zysik does worry about other aspects of estate-planning policy that are up for grabs during the current tax debate.
Currently, assets given to heirs have a “step up in basis” in valuation, meaning that an heir is not liable for all of the asset’s gains during the donor’s lifetime.
Take, for instance, shares of company stock purchased for $1,000 a half century ago. Imagine that, in 2010, the shares are worth $100,000 when their owner dies and wills them to her son. If he sells the shares this year, when their value has risen to $150,000, he will owe capital-gains tax only on the “stepped up” valuation of the shares. That is to say, the $50,000 in appreciation between the time of his mother’s death and his attempt to liquidate the shares, not the stock appreciation during the previous 50 years.
A plan circulating the House would do away with the estate tax but keep the step-up basis intact. President Trump has not weighed in on the issue, but during the campaign he pushed to place a capital-gains tax on assets above $10 million at the time of death. Mr. Zysik said he doubts that Congress, as it searches for ways to pay for a tax cut, would be willing to repeal the estate tax while keeping the step-up in basis method.
Holly Welch Stubbing, in-house counsel at the Foundation for the Carolinas, said that she and her colleagues are closely watching what is happening in Washington — how Congress deals with the value of appreciated assets and how those assets are treated under both the estate and capital-gains tax will affect charitable giving.
Ms. Welsh Stubbing says donors in her foundation’s network have a variety of views on the estate tax. While the amount their estate is subject to tax may inform their giving decisions, she says, ultimately they give from the heart.
“The folks we work with are motivated by their charitable passions, first and foremost” she says. “Tax planning plays into the ‘how’ and the ‘what’ but not the “why.’ "
