Could President Trump’s Estate Tax Proposals Impact Charitable Giving? Planned Giving Council of Houston January 26, 2017 Laura Hansen Dean, J.D. Associate Vice President University of Texas Medical Branch laura.dean@utmb.edu

CURRENT FEDERAL TAXATION FEDERAL ESTATE TAX for deaths in 2017 $5.490 million per decedent passes estate tax free; Married couples get 2 x $5.490 million exemption with marriage portability; Plus unlimited amounts to surviving spouse (qualified spousal gifts); Plus unlimited amounts to 501(c)(3) orgs – charities.

$14,000 annual gift exemption; Plus used portion of $5.490 million; FEDERAL GIFT TAX IN 2017 $14,000 annual gift exemption; Plus used portion of $5.490 million; Plus unlimited amounts to spouse; (qualified spousal gifts); Plus unlimited amounts to 501(c)(3) orgs – charities. FEDERAL GENERATION-SKIPPING TAX IN 2017 $5.490 million of present value per grandparent transferor. (These two taxes were thought to prevent wealthy individuals from diverting income producing assets to younger family members at lower tax brackets; a substantial loss of federal income tax was feared.)

BASIS Generally assets that pass through an estate get a step- up in basis to the fair market value on the date of death of the decedent or the alternate valuation date. This reduces the recipient’s capital gains tax exposure.

SOME OF PRESIDENT TRUMP’S TAX PROPOSALS FEDERAL ESTATE TAX Repealed. Gift tax and generation skipping taxes also likely repealed (not specifically included). BASIS Step-up in basis for the first $10 million. Capital gains on assets over $10 million would be due only when, or if, the assets are sold. If these assets are never sold by the recipients, then the capital gains tax would never be paid.

CHARITABLE GIVING How has the almost total repeal of federal estate tax since 2011 impacted how you talk with donors? How might it impact working with donors/couples with assets over $5.49/$10.98 million now? How much is enough for their children/heirs and what does that leave for charity? What impact do they want the excess to have? What about philanthropic inheritances?

Bank of America biennial survey of high net worth individuals reports that these donors report that changes in the federal estate tax (presumably including total repeal) would not change their testamentary giving plans. Some commentators have suggested that even if the federal estate tax is totally repealed, it could be reinstated “with a vengeance,” resulting in rates higher than 40% on the taxable amount. So some commentators are suggesting that their clients with taxable estates move assets into irrevocable trusts if the estate tax is repealed, including charitable trusts, to prevent future estate taxation.

Charities report an increased interest in lifetime giving to avoid capital gains taxes if not a taxable estate. For estates with capital gain assets that exceed $10 million, the decedent could use some of the excess that heirs will want to sell to fund a lifetime CRT to avoid recognition of capital gains above adjusted basis. Heirs may have close to the same or slightly more economic value from the CRT than the sale proceeds.

What about non-grantor charitable lead trusts to “freeze” the value of assets that will pass to heirs/family when there is charitable interest? What about grantor (lifetime) charitable lead trusts to generate income tax charitable deduction with phantom income (interest rates are rising so perhaps tax-exempt interest possible) with grantor getting assets back? What about non-qualified testamentary split- interest gifts to charity when estate tax charitable deduction is not needed?