Episode 27: Planned Giving and Estate Law Changes

Welcome to another edition of “Around with Randall”. Your weekly podcast on making your nonprofit more effective for your community. And here is your host, the CEO and founder of Hallett Philanthropy, Randall Hallett. 

Always appreciate those listening and watching when they join me here on another edition of, “Around with Randall.” Today's subject matter is one that I enjoy greatly. I miss it because I do more consulting than I do obviously as time as a practitioner. It's also going to become much more important here in the near future and that's the aspects in the conversation around plan giving. I'm not going to spend a great deal of time teaching or talking about the various vehicles that planned giving provides, but there is the inklings of some conversation that's going to affect it greatly. And that's why I want to talk about it here today. And in the end, want to spend just a few minutes on the tactical. 

What is it you should be preparing for? I think many of us after the 2020 election, particularly those of us who study tax policy and taxation issues believe that there would be a conversation coming out of the Democratic White House and the Democratically controlled Congress around taxes and in particular, what the levels would be. There now for the first time are rumors of the administration and Congress looking at what they're going to do, in particular, driven by a conversation that Janet Yellen, the Treasury Secretary had here recently. I'm not going to spend any time on the political aspects of raising or lowering taxes, but I do want to talk about how it affects us and in particular planned giving.

The reason why this is happening, no big surprise, is that there is a push to have more revenue coming into the federal government. Historically, when we put it in the context of planned giving, we've seen a cataclysmic shift in the last 25 years or so in how estates are taxed. Just to give you some context, in 2001 an exemption, meaning the amount of money that wasn't taxed inside someone's estate, once they pass, they would be tax-free at about $675,000 with a 55% tax on any dollars above that, before it was passed to an individual. Not dealing with charitable, just taxation rules and laws. In 2009, that exemption was moved up to 3.5 million during the first year of President Obama's term. 3.5 million would be tax-free when it was passed and the taxation rate was 45%. In 2021, based on the changes in 2017, the exemption level is 11.7 million, with a taxation rate above that of 40%. Well, what's the outcome of that? Well, in 2009, there were 5,700 taxable estates in the United States. In 2021, there were 1,900, so a drop of. 75%. What this would do is if they change the rules, which we're going to talk about, it would increase the amount of people having to pay tax on their estate, into the billions of dollars.

All of that is history. That's not even important. The question is what they're going to do next. Best guesstimates are that the exemption level, the amount that someone would have to pay tax on like we talked about 3.5 million in 2009 and 11.7 million in 2021. So, anything above that will come down, it's probably going to come down to similar numbers around 2009 is my best guess. That's not even the most important. What may be the biggest change is what they call the step-up value and an adjustment in that.

So, let me give you an example of how that's handled. If you're thinking, well, I don't want to listen to this. This is boring. If you're a gift officer, if you're a nonprofit, I highly recommend you spend the next 10 minutes listening because it's going to become very, very important to you very, very quickly. Step-up value was designed so that when someone buys something and it stays in their life and then at the end, when they pass, so in their estate, the value of that is stepped up to the moment when they pass. 

I'm going to give you three examples to make it pretty crystal clear for those of you who didn't study tax law. If you bought a share of Berkshire Hathaway in 1980, you would have paid about $300. If you bought some Apple stock in 1980, let's say at its offering of $1000, that's about $25 a share at the time, or let's say you bought a house for $50,000. The value of those today in 2021 would be as follows: that single share of $300 at Berkshire would be worth $388,000. That thousand dollars of Apple stock would be worth just under $9 million. And that house, depending on where you live, you purchased, or someone purchased in 1980 for $50,000 would be worth possibly $350,000. The way this works currently is that those who inherit those assets only pay taxes at the level above what the value was at the day that their loved one or someone died. You don't pay the capital gains.

Let's take the Apple stock purchased in 1980 for $1,000, now worth 9 million. You would only pay taxes on it, if it was worth more than that $9 million, not on the original thousand dollar investment. In addition, that house, which is primarily most people's value in their estate. You wouldn't pay any tax, on anything at or under $350,000. Versus the $50,000, that may be a couple early on in their life purchased and then lived in the house for the next 40-50 years. What the conversation that is being discussed and Secretary Yellen is on the record of saying, she wants to look at step-up basis and possibly making some first-time changes in 40-50-60 years to that provision. Which would mean that taxes on, let's say the house, the estate or the recipient of that when they sell would be taxed on the capital gains from $50,000 to whatever they sold it for.  Billions and billions and billions of dollars in additional revenue would be coming into the federal government based on estate taxes. Then you add to that if you lower the amount from 11.7 million, that is exempted, meaning you don't have to pay tax on it, down to let's say 3.5 million where it was at the beginning of President Obama's term. You're talking about massive change to estate planning. Massive! You can read more about step-up rules. It's probably something you want to be a little bit more aware of. There is a conversation that possibly there might be an exemption for the step-up rules as well. I.E. the first $500,000 would be exempt or something of that nature making estate planning, even more complicated. I've just spent 7-8 minutes talking about political/tax issues currently being discussed in the federal government. They're all rumors and innuendo. Something's going to happen. Many of us who've been doing this for a long time -- when we saw the changes in 2017, going to 10.5 million at the time and now 11.7 million I think anybody with a brain recognized this is not going to last if there are a Democratic House and Senate and President. It was too much of a jump and it was too one-sided in terms of the way the vote happened politically so that we have to be prepared for another adjustment.

What does this mean for you, tactically, even if you didn't quite get all of that? The first thing is what this is going to do is increase dramatically the opportunity we have in the nonprofit world to enhance planned giving opportunities and conversations. If you're not building out a communication plan to talk about estate giving, even if it's just putting something at the bottom of a pledge form or an envelope that says I've included an estate gift in my thoughts for you as a nonprofit, or maybe you're more formalized, you're sending out regular communication.

If you're not doing something, tactically number one, you're going to regret it because more and more people are going to increase their planned giving conversations with charitable intent. If they lower the exemption back down to $3.5 million. It's not going to be everybody, but a 75% reduction happened the last time from 2009 to today. That means there's going to be a fourfold increase in the number of estates that could be taxed, which means more people will say, gosh, I'd rather give it to a nonprofit than have it taxed when those assets are sold. 

So, first thing is how are you communicating with your donors? Those most generous, most loyal donors who believe in your mission wholeheartedly. Number two tactic is you probably need to look and have a better understanding of your gift acceptance policies. Conversations around appreciated assets are going to be more valuable in the future. If the step-up basis changes, i.e. there's a higher tax rate on appreciated assets that have been held by an individual or couple for a long period of time. It may be more advisable for them to get that asset out of their estate and leaving more cash-driven options for their loved ones because cash has a present value of whatever the present value is with no step up. The dollar’s worth a dollar, a dollar might've bought more in 1980, but it's still worth a dollar.

So, things like houses are going to become more complicated in terms of passing them on and may be better for an individual to give to a nonprofit. Stock is another one that probably will become more of a conversation and planned giving opportunities. Are you ready for conversations with your organization that allows those types of gifts to be used and given on a regular basis?

There's more complication with accepting a house, buy from a nonprofit. Normally there should be a process for a review that might include a phase one environmental study, and who's going to sell the house. Is there a policy about what we sell it for? Is there a process of how long we should hold things? Do we hold stock more than we do homes? In the end, do we end up also saying we don't hold anything? We sell it all as quickly as we get it. If you're a smaller nonprofit, are you actually built to do these kinds of activities? Looking at reviewing and thinking of different scenarios that are engaged with or utilize your gift acceptance policy is critically important.