Charities Avoid Federal Estate Tax Cut Dispute

The debate over changing the federal estate tax has put charities in an awkward position. Leaders at many nonprofits are concerned that further reductions or an outright abolishment will hurt annual giving.

A bill that would cut taxes on estate inheritances failed in the U.S. Senate by a 56-42 vote on Aug. 3. Though it is frequently called a Republican bill, four Democrats voted for it, including Blanche Lincoln of Arkansas. The bill passed the U.S. House of Representatives by a 230-180 vote just a week before.

The Senate will debate the bill again in the fall.

Charity executives in Arkansas and across the nation are not openly opposing estate tax changes proposed on Capitol Hill. The decision to steer clear of the political fray is in deference to patrons who might favor altering the estate tax.

Jo Luck, president and CEO of Little Rock’s Heifer International Inc., and others have adopted a cautious “no comment” stance.

Although the estate tax only hits the richest of the rich, charity executives don’t want to step onto the firing line where current or future donors might have strong feelings about what opponents call the “death tax.”

Pat Lile, president and CEO of Arkansas Community Foundation Inc. in Little Rock, is monitoring the estate tax debate. Her group is content to observe from a safe distance.

“Many donors are people of high wealth,” Lile said. “That has made it a little bit of a challenge to take a stand on this issue. Our organization has a history of not taking political positions, and this is not one we’re going to put our toe in the water on.”

Altering the estate tax, with its no-limit deduction for charitable donations, gives Lile and others pause. If large estates didn’t have to contend with estate taxes and use nonprofit gifts to help offset the financial hit, would philanthropy suffer?

“I’m concerned about it,” Lile said. “There are good people on both sides of the debate. Some say there will be no effect. Others say there will.”

Some believe that without the estate tax’s added incentive to give, charity funding will suffer.

The Urban-Brookings Tax Policy Center in Washington, D.C. cites statistics that suggest a link between cutting the estate tax and cutting charitable gifts. It was noted that when the top estate tax rate was reduced in 2003, charitable bequests dropped 18.2 percent from $17.8 billion in 2002 to $14.6 billion.

Despite the timing, it’s uncertain how much of the drop was related directly to the tax change and how much could be attributed to other variables.

Janet Ginn, president and CEO of the Heifer International Foundation, said cash donations to her group actually rose during the past two years, although many nonprofits reported that giving was down in 2004-05.

“About 90 percent of our supporters contribute through donations to our organization because they want to make a difference,” Ginn said. “It’s not that the tax breaks aren’t nice, and we make sure our donors are aware of estate taxes, capital gains taxes and other issues that can affect their gift.”

Using this backdrop, she estimates that Heifer International could lose as much as $1.8 million — 10 percent of the $18 million future value in bequests on the organization’s books — if the estate tax was removed from the equation.

While it’s undeniable that charities reap benefits from the estate tax structure, historical evidence indicates this was an unintended consequence.

For now, the estate tax has a $2 million exemption per individual and a tax rate as high as 46 percent on the balance.

The exemptions are set to increase to $3.5 million per individual with a top rate of 45 percent in 2009.

The Tax Policy Center in Washington, D.C., estimates that the estate tax less than 1 percent of all estates.

Estate Tax History

The current estate tax can be traced to 1916 and is the fourth incarnation.

The first estate taxes collected in America date back to 1797 to raise money for naval rearamament programs.

During the Civil War, an estate tax was instituted and later repealed in 1870. Initiated in 1862, the tax ranged between 0.75 percent and 5 percent. Two years later, the top rate was increased to 6 percent.

An estate tax was re-established in 1898 to help pay for the Spanish-American War. The tax, with a top rate of 15 percent, was abolished in 1902.

World War I was the backdrop to the 1916 law, which set a top rate of 10 percent on estates of $5 million or more. Some form of estate tax has remained on the books ever since.