Estate, gift and capital gains taxes are scheduled to disappear by 2010, and may be gone permanently if Congress decides to revisit the tax legislation before then. That fact has some people worried that donors will lose their motivation for giving.

Yet experts disagree. “Lifetime gifts are generated for purposes other than taxes,” says John Hopkins, estate attorney with Hopkins & Carley in San José, California. “People give to causes they believe in. The tax break simply makes the gift cheaper.”

Indeed, the 2003 Wealth and Values Survey conducted by Community Foundations of America and HNW, a research and marketing consulting firm, are more interested in supporting their favorite causes than getting tax breaks from charitable gifts. The study revealed that 83 percent of affluent individuals surveyed believe that money is a powerful tool for doing good, and the majority also felt an obligation to give back to their communities.

Still, vanishing estate taxes raise important issues. Hopkins has not noticed any change in giving patterns, but he has seen certain issues crop up more often. “We’re having more discussions about how much extra, if any, to leave to one’s heirs,” he says. “The super-wealthy may not decide to leave the extra money to their children because they worry too much wealth will spoil them.”

Donors Seek Giving Advice
Seeking answers to these questions, many donors are consulting financial advisors. That’s why Charles D. Haines, Jr., CFP, President and CEO of Charles D. Haines, LLC in Birmingham, established the Family Philanthropy Center as a separate division of his business.

The powerhouse behind the Family Philanthropy Center is its director, Leslie Kelly Carlisle, MBA, CFA, with her 25-year background in investment and corporate finance. In general, the larger the gift, she says, the less concerned clients are about avoiding taxes. “My goal is to help clients understand the tradeoffs of each vehicle completely so they can make an informed decision,” Carlisle says.

“If tax-efficiency is a primary goal, donors will not choose to create a family foundation,” Carlisle says. “On the other hand, if they wish to be stewards of their money, and bring the entire family into the process, they’ll choose a family foundation regardless of tax consequences.” Many advisors agree that family foundations are often used to support the donor’s favorite causes as well as a tool to bring family members together through giving.

Donor advised funds are among the most popular vehicles right now, Hopkins says, because they are easy to administer and have no annual reporting requirements. Many clients also use them as a training ground, Carlisle says, or to park a windfall to avoid income tax until they’ve made a decision about gifting. Gifts to a donor advised fund are especially advantageous in a year where the donor’s assets are subject to higher tax rates.

Direct Gifts versus Donating Assets
For clients who wish to keep their giving plan easy, the simplest vehicle by far is a direct charitable contribution of cash or publicly traded stock, Carlisle says. “It’s a one-time contribution, there’s no fund created, and it’s tax deductible, which won’t change.”

Perhaps it’s no surprise that direct gifts are also the easiest for charitable organizations to handle. “We love cash,” says Sandra Wood, vice president for philanthropic services at the Hartford Foundation for Public Giving. “But for our clients’ sake, we advise them to look at appreciated stock, which can be more tax-efficient for them.”

Carlisle agrees and says that appreciated stocks will become even more valuable if the estate tax is abolished. “Highly appreciated stock should be your first contribution because you get the deductibility at market value and neither you nor the charity have to pay capital gains on it.”

Non-Traditional Gifts
Other nontraditional donations can be problematic from a tax and technical point of view. “Clients with a great deal of wealth in a private family business are hard to place,” Carlisle says. “Community foundations and donor-advised funds have been among the most flexible in accepting these gifts.”

Tangible assets, such as collectibles or art, could be tax-efficient gifts, but their scope is narrow due to Related Use laws. To obtain the maximum tax benefits of the gift, the tangible asset must be donated to charities that will be able to use them in a way related to the purpose that qualifies the charity as tax exempt. For example, you could give a painting to a museum or a yacht to a sailing school because the gift would meet the related use test. Since tax laws are complex around these kinds of gifts, it is important for donors to work with both advisors and tax professionals to ensure that the gift is tax efficient.

Many advisors remain uncertain that the tax laws will be permanently repealed. Despite any pending changes, many professionals agree that donors choose to give because of a charity’s mission—not for the tax benefits.

“Ultimately, philanthropy requires a balance between heart and mind,” Carlisle says. Donors should choose and monitor their gifts wisely while opening their hearts to the causes they believe in. One thing Carlisle urges of all her clients is to become involved with philanthropy during their lifetimes. “That’s where the fun and rewards come in.”

Eva Marer is a freelance writer based in New York City.
Copyright 2004 Community Foundations of America
Used with permission