How the new estate tax rules could reduce charitable giving by billions

Congress and the Trump administration scaled back the estate tax when they enacted the new tax law.

Although the government didn’t do away with this tax altogether, as many conservatives had long called for, trimming the tax incentives the wealthy have to give could mean that some nonprofits will soon see their budgets pinched by a decline in charitable giving.

As an economist and a scholar of philanthropy, I anticipate that bequests from estates could decline by about US$7 billion a year.

The first $11 million

The estate tax encourages giving with a dollar-for-dollar deduction from estate and gift tax liabilities matching any amount of money bequeathed to charities after death. In other words, wealthy estates save $1 in taxes for every $1 they give to charity.

Once a significant moneymaker that generated 10 percent of federal tax revenue, the estate tax was responsible for only about 1 percent of those funds prior to 2018.

Now, the first approximately $11 million in wealth one person leaves to their heirs will be entirely tax-free. That level doubles for couples. This new cutoff, which is twice as high as the old one, will rise over time as the government automatically adjusts these exemption levels for inflation. The rate to be paid after meeting the cutoff, however, remains unchanged at 40 percent.

In practice, here’s how that works. If a couple passes on an estate valued at $25 million and they leave $3 million or more to charitable causes in their will, under the new rules their heirs would owe no tax at all on this inheritance. That is because the value of the estate would be under the $22 million threshold.

Most people don’t leave anywhere near that much money behind, so the number of families this tax actually applies to is tiny. Only 1 in 500 estates in a given year owed any federal inheritance taxes, before the government doubled exemption levels as part of the new tax law. That share will get even smaller now.

And rich families use loopholes to reduce the tax’s impact or get out of paying it at all.

Bequest incentives

When the government weakens the estate tax, there are two likely scenarios in terms of giving. The people inheriting a larger share of great fortunes might leave more of their windfalls to charity. Alternatively, they could keep more of the money to invest, enjoy or share with their families and friends.

When the price of anything rises – whether it be bacon or tennis balls – economists expect demand for that product or service to fall. Without an estate tax, there’s nothing to be gained, accounting-wise, from rich people writing posthumous charitable gifts into their wills.

The question is, do fewer multimillionaires write charities into their wills when this incentive goes away or becomes smaller?

The money at stake is significant. Bequest giving has more than tripled in inflation-adjusted dollars over the last 40 years, rising to more than $30 billion in 2016 from less than $10 billion in 1976, according to the Giving USA report, which the Indiana University Lilly Family School of Philanthropy researches and writes in partnership with the Giving USA Foundation.