Impact of the 2010 Tax Act on Charitable Giving
By Peggy Jackson
April 2011

It’s a daunting task for donors and their advisors to do estate, financial and philanthropic planning, given that the tax laws are constantly changing. Three provisions of the recently passed Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “2010 Tax Act”) may be of interest to nonprofits:

• The extension of the IRA rollover provision
• Full deductibility of charitable gifts
• Planning opportunities due to estate and gift tax changes

Extension of the Charitable IRA Rollover Provision
Through the end of the 2011 tax year, donors over age 70 ½ can transfer up to $100,000 per individual ($200,000 per married couple) directly from a traditional or Roth IRA to a qualified nonprofit without being subject to federal income tax on the withdrawal. These transfers can be counted toward the donor’s minimum distribution requirements.

Other Gifts Fully Deductible
The “Pease Amendment,” enacted in 1991 required higher income taxpayers to reduce their itemized deductions by a formula-based amount which reduced the value of their charitable deductions. The reinstatement of this amendment, scaled back in recent years, has been delayed until January 1, 2013. Therefore, appropriate charitable gifts are fully deductible for certain high net worth taxpayers.

Estate and Gift Tax Changes
The increase in the unified credit and the reunification of the gift and estate tax systems may have the greatest impact on charitable gift planning over the next 2 years. Individuals can now leave $5 million (or $10 million for a married couple) tax free either during lifetime or at death to non-charitable heirs, and the portion of the unified credit unused by one spouse may be used by the other. There are differing views of the impact of this change on charitable bequests. The ability to leave more to loved ones tax-free may result in a significant decline in charitable bequests, since it will no longer be necessary for many wealthy individuals to leave money to charity just to save taxes.

On the other hand, the reduction in estate taxes may increase amounts given to charity at death. Donors who have decided on a specific amount they want their heirs to receive, can make plans to pay the tax on that amount, and can leave the remainder to charity. Or, if a donor’s intent was to leave a specific amount to charity, now the donor’s heirs can receive a greater amount than previously thought, reducing the “cost” of the charitable bequest to the family.

If donors choose to transfer the maximum amounts permissible during their lifetimes, they will have no unified credit left to shield any of their estate from taxes at death. This may result in a greater incentive to make charitable dispositions at death.

Nonprofits may also see an increase in gift annuities and charitable trusts benefiting a sibling, a parent or a friend, since individuals now have $5 million to offset the gift tax due on the value of the income interest given to a non-spouse. And finally, lead trusts may provide donors with the opportunity to transfer amounts in excess of the $5 million exemption, if the trust is funded over the next two years while the $5 million “window of opportunity” is open.

In summary, while it is not clear what effect the Tax Act will have on charitable bequests, the net result of the estate and gift tax changes in the near term may be to encourage use of the charitable IRA rollover, the funding of trusts and other life income gifts for non-spousal heirs, and the creation of charitable lead trusts that help leverage the gift tax exemption.

The purpose of this article is to provide information of a general character only.  Schultz and Williams is not engaged in providing legal or tax advice, consequently S&W does not guarantee the accuracy of such information.   Always seek advice of a licensed advisor with any questions you may have regarding a legal or financial matter.

Schultz & Williams is a national consulting firm based in Philadelphia; providing management, fundraising and marketing consulting for nonprofit organizations, along with full-service direct marketing, database and creative/production services.