Charitable Planning Today: Legislative Update Plus – Jerry McCoy

On October 21, 2009, I attended a program of the Northern California Planned Giving Council titled Charitable Planning Today: Recent Developments, Pending and Proposed Legislation, and Other Things You Should Keep in Mind presented by Jerry J. McCoy.  Here are some of the highlights:

  • Treasury's report to Congress regarding donor-advised funds (DAFs) and supporting organizations (SOs) remains past due.  Among the items to be covered by this report:
    • Whether deductions are appropriate for contributions to DAFs and SOs.
    • Whether a minimum distribution requirement should be imposed on DAFs.
    • Whether contributions to DAFs are completed gifts that qualify for a deduction.
    • Whether any of these issues also raise issues with respect to other forms of charities or charitable donations.
  • Treasury's report to the Senate Finance Committee and House Ways and Means Committee regarding the use by exempt organizations of insurance contracts for the purpose of sharing the benefits of the organization's insurable interest in insured individuals with investors is also overdue.  Read more about Stranger-Owned Life Insurance (SOLI) and charity involvement here.
  • The Charitable IRA provision ends in 2009.  There are various proposals to extend it again; make it permanent; expand its coverage to include contributions to DAFs, SOs, private foundations, and contributions through charitable remainder trusts, and charitable gift annuities; and/or remove the $100,000 annual limitation and make it available to younger taxpayers.
  • The Obama Administration's budget proposal includes a provision limiting all itemized deductions (including the charitable deduction) for all households with annual income over $250,000 ($200,000 for single taxpayers), beginning with contributions made in 2011.  Currently, donors in the top income federal tax bracket are taxed at the 35% level and can generally deduct their contributions in full.  So, a $1,000 contribution reduces such donor's tax liability by $350 (and effectively costs the donor $650).  But a donor in a lower tax bracket does not get the same benefit.  For example, a $1,000 contribution by a donor in the 15% bracket will only reduce such donor's tax liability by $150.  Under the Administration's proposal, a deduction could only be taken up to the 28% bracket.  So, a $1,000 contribution by a donor in the highest tax bracket could only reduce such donor's tax liability by $280 (instead of $350).  Is this more equitable?  Will this reduce the amounts going to charities?  McCoy noted that many charities are in a no-win situation regarding this proposal, but it may not have as serious an impact as some commentators have suggested.
  • The estate tax system looks like it was designed by Monty Python (McCoy's words).  For 2009, the top estate tax rate is 45% and the exempt amount is $3.5 million.  For 2010, there is no estate tax, but we would have a carrover basis, with a $1.3 million exemption.  For 2011 and beyond, the top estate tax rate and exempt amount return to 55% and $1 million, respectively, but we would once again have the credit for state death taxes ("maximum credit of 16% produces a top net tax rate of 39%").  McCoy stated that the popular consensus was that the 2009 tax levels would be made permanent, but repeal forces have countered with a top rate of 35% and exempt amount of $5 million.

More to follow on McCoy's presentation on the Increasing Payment Charitable Lead Annuity Trust.