Wednesday, January 13, 2010

The New Estate-Tax Math: Give to Charity or Your Children?

With the estate tax on a hiatus in 2010, many experts are warning that the missing tax could result in thousands of U.S. charities seeing fewer donations this year. In previous years, it was considered a smart tax move for wealthy taxpayers to leave a portion of their estate to various charities, in addition to their heirs. However, since the IRS will not assess any tax on estate in 2010, it is likely that more Americans will leave all of their wealth to heirs.

According to this article on Wall Street Journal, before the repeal of the estate tax, leaving money to charities was not really a choice for wealthy Americans, but a generally smart financial move.

With the government taking a large chunk for the estate tax, the choice was to leave a portion to heirs after the IRS took its chunk, or leave the full pretax amount to charity. In other words, for each $1 of the estate, the wealthy could leave $1 to charity, or they could leave 55 cents for their heirs and 45 cents to the IRS (with various caveats for spouses, thresholds etc).

As of Jan. 1, however, there is no estate tax, at least for a year. So the wealthy now have a more equal choice: $1 for heirs, or $1 for charity. Guess which one they probably lean toward?

“I’d like to think we’re all altruistic,” Sanford J. Schlesinger of Schlesinger Gannon & Lazatera LLP, told Financial Planning. “But especially in a dreadful economy, repeal will have a devastating effect on charity.”

Adds Ben Harris of the Brookings Institution and Urban Brookings Tax Policy Center: “With repeal, the price of charitable giving is more expensive. This is a monumental change in the estate-tax rate. We’re not talking about going from a 45% estate tax to a 35% tax. We are talking about from 45% down to zero. Does this mean people won’t give to charity anymore? No. Of course they’ll give to charity; just less.”

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