Trump’s Estate Tax Plan Good for Wealthy, Bad for Charities

BNA Snapshot

* Estates over $50 million give most to charity

* If tax repealed, wealthy might lose incentive to make charitable bequests, analysts say

By Allyson Versprille

Sept. 12 – Donald Trump’s campaign promise to repeal the estate tax would pad the pockets of multimillionaires, but analysts and researchers agree that such an action might be detrimental to charitable giving.

Part of the Republican presidential nominee’s tax platform calls for a repeal of the “death tax,” an often politically charged reference to the 40 percent tax on estates worth more than $5.45 million.

“If candidate Trump becomes President Trump and then somehow works out the logistics of repealing the estate tax, that would have a pretty volatile impact on charitable bequest giving,” said Patrick Rooney, an associate dean for academic affairs and research at the Indiana University Lilly Family School of Philanthropy.

“There are a lot of motivations for giving, and taxes come into that,” Rooney told Bloomberg BNA Sept. 7, noting that while some people have purely philanthropic inclinations, others are motivated by tax incentives. Donations to charity are deductible from a taxpayer’s gross estate at a dollar-for-dollar rate and there are no limits to that contribution.

Others may be driven by a desire to give as little as possible to the Internal Revenue Service, Rooney said.

“Generally, people don’t give just because of the estate tax, but there may be some people who do because they’re philosophically or ideologically motivated to not give anything to the federal government,” he said.

Most charitable bequests are made by estates at the “extreme top end of the wealth distribution,” according to Robert McClelland, a senior fellow in the Urban-Brookings Tax Policy Center.

Dennis Belcher, a partner at McGuireWoods LLP, said clients with estates worth $50 million or more are typically the ones who leave bequests. When meeting with those individuals, they often ask two questions before deciding whether to make a charitable contribution: “How much money do we need?” and “How much do my children need?” he said.

Generally, clients at the higher end of the wealth spectrum who perceive that they have enough wealth for their children will “end up using charity to reduce the estate tax burden,” he told Bloomberg BNA Sept. 7.

IRS statistics of income data on estate tax filings support this conclusion. For 2014 – the most recent year for which data is available – estates worth $5 million or more claimed $18.3 billion in charitable deductions out of a total $18.4 billion for all estates that filed a return. Estates valued at $50 million or more contributed $10.7 billion alone, or 58 percent of the total amount of claimed deductions.

These statistics are consistent with information included in the 2016 annual report on philanthropy published in June by the Giving USA Foundation in collaboration with the Lilly Family School of Philanthropy.

“The largest proportion of charitable bequest amounts claimed in any given year is from very large estates that must file estate taxes,” the report said.

Those very large estates would have a reduced incentive to make a charitable bequest if the estate tax was repealed, said McClelland, who previously worked in the tax analysis division of the Congressional Budget Office examining the impact of federal tax policy on charitable giving and bequests.

McClelland wrote a 

If Trump becomes president and “works out the logistics of repealing the estate tax, that would have a pretty volatile impact on charitable bequest giving.”

Patrick Rooney
Indiana University Lilly Family School of Philanthropy

Previous working papers published by the National Bureau of Economic Research estimated that charitable bequests would decline anywhere from 12 percent to 37 percent if the estate tax was repealed. In 2004, McClelland estimated that number to be in the range of 20 percent to 30 percent.

McClelland told Bloomberg BNA Sept. 9 that there would still be a significant decline today in bequest giving, but that number would probably be smaller because “the change in the incentive would be smaller.”

In 1999 and 2000, the maximum estate tax rate was 55 percent. Today, the top rate is 40 percent. A drop from 55 percent to zero would be a greater change than 40 percent to zero, so the impact on bequests would be slightly less than the 20 percent to 30 percent estimate, McClelland said.

A 2015 Center on Budget and Policy Priorities report echoed the sentiment that repealing the estate tax would reduce charitable contributions, although it didn’t assign a specific value to the decline.

While analysts agreed that repealing the estate tax entirely would likely reduce the number of charitable bequests, most saw Democratic presidential nominee Hillary Clinton’s proposal as being a boon to charitable giving.

In line with previous Obama administration proposals, Clinton said she would restore the estate tax to 2009 parameters – an exemption of $3.5 million and a top tax rate of 45 percent.

“Moving the exemption back to 2009 would have a positive impact on charitable giving, but it would probably be on the small side,” McClelland said.

Lowering the exemption level would create an incentive for estates smaller than the current exemption but larger than $3.5 million to make charitable bequests, he said. However, “those incentives would be partially offset by a possible reduction in bequests by estates larger than the current filing threshold because the lowered exemption level leaves them with less after-tax wealth to distribute,” he said.

Increasing the tax rate has the potential to have a greater impact. Raising the rate to 45 percent would increase the incentive to leave charitable bequests for all estates above the current exemption level, including the largest ones responsible for a majority of bequests, McClelland said.

Rooney said that in a 2014 study, he and his colleagues at the Lilly Family School of Philanthropy found that raising the top marginal tax rate by 10 percent increased bequest giving by 5 percent to 7 percent.

The 2016 Giving USA report reached the same conclusion. “Higher tax rates have been shown to increase the dollar value of bequests, such that the amount donated to charities exceeds the amount of tax revenue that would have been collected had there been no charitable deduction or a lower tax rate,” it said.

Kim Laughton, president of Schwab Charitable, a nonprofit donor-advised fund established with the support of Charles Schwab & Co. Inc., said regardless of either candidate’s estate tax proposal, charitable giving will continue in the long term.

“Estate taxes are much less influential on giving than people’s own philanthropic inclinations, passions. People who give are going to give, regardless of these levels,” she told Bloomberg BNA Sept. 9.

“In the short term though I think there probably is reason to believe that the various proposals could cause some increase or decrease in current year giving perhaps-or maybe a year or two of giving-while people are adjusting to what the new rules might be,” Laughton said.

Clinton’s plan may have a positive temporary impact, Laughton said. Her proposal “could arguably increase the incentive for people to get money out of their estate,” she said.

That seemed to be the case in 2012, the last time there was a threat to the estate tax exemption and rate levels, according to Laughton.

“We did see – amidst everything else that was happening in 2012 with the fiscal cliff – a lot of people doing estate planning. Part of the motivation was potentially to get their estate levels down to the level they might need to be at” should the exemption threshold be reduced, she said.

That year Schwab Charitable saw contributions more than double, Laughton said. A potential change to the estate tax wasn’t the only contributing factor to that increase, but it was likely one of the drivers, she said.

Conversely, if the estate tax is repealed under Trump’s plan, the ensuing perspective depends on what logic a person follows, Laughton said.

On one hand, repealing the tax gives people more discretionary money that can be donated to charity, she said. On the other, there are taxpayers who might be more driven by the tax incentives and getting money out of their estate, Laughton said.

In those circumstances “you could see giving go down because they may have less of a short-term incentive to get money out of their estate,” she said.

“The question becomes which force is greater? If you give people more money, will they use it for charity? Or if you give them a tax incentive to give to charity, is that a greater force?”