Charities See Downside of Probable Estate Tax Changes

Change is in the air. Changes to the federal estate tax are coming, but what those changes will be is still uncertain. Charitable organizations are waiting anxiously as a repeal of the tax could remove an important incentive for tax-deductible giving.

House Majority Leader Steny Hoyer announced on October 27 that he expects the House of Representatives to revise the estate tax before it expires at the end of 2009.

The estate tax, which is a tax on the transfer of assets from a deceased person to his or her beneficiaries, but does not apply to charitable bequests, is scheduled to disappear at the end of 2009. The suspension of the tax is effective for only one year unless Congress acts to extend or revise the tax. Historically, Congress has made numerous, temporary changes to the estate tax rate and the exemption amount. Since 2001, the top tax rate has decreased incrementally from 55 percent, and the tax exemption amount has increased incrementally from $1 million. In 2009, the estate tax is effectively a flat rate of 45%, and the exemption amount is $3.5 million. Much of the federal estate tax “savings” has been at the expense of the states, with a gradual phase-out of the state death tax credit. That phase-out caused many states, including Illinois, to enact their own death taxes. In many situations, the state death tax exemption amount does not match the federal exemption; Illinois, for instance, has a $2 million exemption.

On Jan. 1, 2010, a suspension of the federal estate tax is scheduled to take effect for one year only. In 2011, under current law, the estate tax will return to pre-2001 levels, with a top tax rate of 55 percent, and an exemption amount of $1 million. The Illinois estate tax is scheduled to revert to an amount equal to the state death tax credit allowed by federal law in 2010, thus effectively disappearing.

Some lawmakers are advocating a more generous exemption, lifting the threshold to $5 million for individuals, and lowering the top tax rate to 35 percent. Others are advocating a lower exemption amount, leaving the entire issue very much up in the air. The Illinois legislature will likely wait to take any action on its estate tax until the federal government shows its hand.

According to the American Veterinary Medical Association , considerable interest has been generated in how potential revisions to the estate tax may affect charitable bequests. According to the Association, the estate tax encourages charitable giving at death by allowing a dollar-for-dollar deduction for such bequests. In fact,  they indicate that a report from the Tax Policy Center, “Effects of Estate Tax Reform on Charitable Giving,” found that a complete repeal of the estate tax would reduce charitable bequests by between 22 and 37%, or $3.6 billion to $6 billion per year.

– Heinz J. Brisske