Repeal of the Estate Tax and Charitable Giving

The repeal of the estate tax for the year 2010 will have a huge effect on the manner and amount of charitable giving --- or will it?

One of the issues raised by the current estate tax situation is the effect it will have on charitable bequests.  From the inception of the law which gradually raised the estate tax exemption and lowered the tax rate, there has been much speculation about its impact on charitable giving. A July, 2004, Report from the Congressional Budget Office estimates, "because repealing the estate tax reduces the incentive to contribute for all decedents who would have faced it, that step would have induced a decrease in charitable bequests of 16 percent to 28 percent."

In 2003, the Urban-Brookings Tax Policy Center predicted that the estate tax repeal would reduce charitable bequests by between 22 and 37 percent.  In an article entitled, "Tax Policy Issues and Options," the Center further reasoned "outright repeal could also change behavior.  It would convey an explicit message that charitable giving at death is no longer encouraged.  It would remove some of the need to do tax planning prior to death.  The elimination of the charitable deduction would eliminate a major selling point for charities."

Since the estate tax currently generates an estimated $25 billion per year in revenue, these reductions, if accurate, would have a significant impact.  But the question I pose is:  will the repeal really have an impact?

Personally, I believe with the way things stand now, that the estate tax repeal will not be a very large factor in charitable bequests for the following reasons:

1.   A person's expected estate depends on how he or she anticipates assets to grow over time.  I believe the present economic condition will have as much, if not more, effect on charitable bequests than the estate tax repeal.

2.   Because the repeal is currently only for one year and there is concern about a retroactive reinstatement, most people will wait for stability in the law before changing their estate plans.

3.   How much does tax savings play in charitable giving?  Many gifts and bequests are made for altruistic reasons that have nothing to do with taxes.  Many people not subject to estate taxes give generously during their lifetimes and out of their estates.

However, if the repeal is made permanent (a move I don't expect to take place) there will likely be a shift toward reduced charitable bequests, as those that give primarily for tax benefits will adjust their planning.