Gift of giving brings breaks

by Stephen Butler

It’s a good bet that the estate tax will be back after 2010, and we’ll all have even more reason to give to charities. The current tax disappears completely in 2010 after grading down over the past several years. The anguished decision-making in the waning months of 2010 have prompted some wags to refer to the bill as the “Throw Mama From the Train” act. A hand-full of wealthy families will have spent over $200 million on lobbyists in an unsuccessful effort to make the tax go away entirely. The estate tax constitutes about 2% of our country’s overall tax revenue, so without the tax, the rest of us will be seeing our income taxes increase by that amount sooner or later.

So, what about charitable giving? Today, Americans contribute $295 billion to charity. It costs the government about $50 billion in lost income tax revenue, and with the estate tax coming back, even more people will be responding to their altruistic inclinations.

Studies have definitely shown that when taxes are higher, people give more. The real reason for giving, however, remains somewhat of a mystery. Testing the theory of whether people give just to save money --- to create the tax savings --- is an experiment conducted by John List and written about in a March 9^th article in the New York Times Magazine by David Leonhardt. Basically, they conducted tests offering different matching contributions and found that higher matches didn’t elicit larger gifts.

What matters to charitable givers, apparently, is the warm-glow that comes from charitable giving. We like knowing that we are the type of person who is helping to save whales and redwood trees. Beyond this is the knowledge that we are part of a much larger universe of nice people. The fact that Warren Buffett gave his $31 billion to the Gates foundation doesn’t prompt others to decide not to contribute. In fact, it offers all the more reason to be part of that group. I still give to my college even though its endowment now tops $31 billion. It needs my money like a hole in the head,

A variety of charitable giving opportunities can generate higher rates of retirement income for donors in some situations. A charitable remainder trust is a classic example of a popular tool that allows people to give highly appreciated assets to a charity and avoid the capital gains tax. The charity then sells the assets and starts paying a lifetime income to the donor based on the total sales price of the assets. Think about a house in California that is owned free and clear and which is worth far more than the $250,000 capital gains exemption for a single owner. All that additional value will otherwise be reduced by 25% (state and federal capital gains combined) if the house is just sold and the net proceeds invested.

Most Bay Area colleges offer advice on charitable remainder trusts and will offer “package deals” that allow you to stipulate, in addition to the college, other charities (such as the Save the Redwoods League of which I am the chairman of the Development Committee.) The counterintuitive fact is that giving can actually increase the amount of income generated from a highly-appreciated asset. It’s a marriage of altruistic and Machiavellian instincts.

Beyond scratching the surface of a variety of charitable giving techniques, there is the growing popularity of family foundations. With “as little as” $1,000,000, it is no longer out of the realm of possibility to consider setting up a family foundation that would operate to perpetuity. Short of that is the concept of using the charitable foundation options sponsored by Fidelity, Vanguard and Schwab with amounts as low as $5,000.

In short, there is no end to the ways we can give away money, and the “warm glow” is enhanced by the smug satisfaction of knowing that, in some cases, some of what we give comes back to us in the form of higher income and lower taxes.

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