Estate tax expiration another blow to reeling charities

Charities are getting increasingly nervous that the repeal of the estate tax may mean fewer donations this year from wealthy investors who opt instead to leave their estates to their families.

The estate tax expired Jan. 1 but is slated to be reinstated next year — at a rate of 55%. That window means that heirs who enter probate court due to a death this year escape last year’s federal tax of up to 45% on estates valued at $3.5 million or more.

As a result, more wealthy investors are looking at changing their wills to take advantage of the tax situation to leave more money to their heirs, said Nick Stovall, chief tax strategist for Gradient Tax LLC.

“People are going to give if they are philanthropists,” he said. “But many people within the $5 million to $10 million range don’t intend to do as much charitable giving as they did, because they can pass it on to their children.”

For charities, the lapse in the estate tax is yet another punch in a series of recent body blows, including the Bernard Madoff scandal and the economic downturn.

“Charities are getting nervous,” said Ray Radigan, a managing director of U.S. Trust, Bank of America Private Wealth Management. “If there is no tax benefit by making charitable bequests, they are worried that people may be less inclined to give charitable gifts when they die.”

Too often, financial advisers allow the tax discussion to dominate their conversations with clients about estate planning, Mr. Radigan said.

“You shouldn’t let the tax tail wag the dog,” he said. “Figure out the intent; how you are taxed should have an impact, but the first thing advisers should do is carry out the intent of their clients.”

In family situations where a will is likely to be probated this year, experts warn that Congress may still bring back the estate tax retroactively to Jan. 1.

To address this possibility, Mr. Stovall is recommending that clients build a grantor-retained annuity trust into their estate plans. These trusts allow investors nine months to rescind their decisions.

“It gives them time to protect themselves while Congress makes a decision,” Mr. Stovall said.

E-mail Jessica Toonkel Marquez at [email protected].