HNWs plan pullback on charitable giving this year

FWR Staff

4 May 2007

Giving was up in 2006, but the estate taxes, healthcare costs saps impetus. Uncertainties about estate-tax laws and growing fears around long-tern healthcare costs mean that U.S. millionaires are likely to be less generous this year than last, according to Northern Trust's latest Wealth in America report.

"Given the current estate-tax exemption schedule through 2010, the uncertainty about the estate tax thereafter, and expectations around health care costs for elder family members, some families -- especially those with less than $3 million -- are reconsidering the need to employ charitable donations in their long-term term financial plans and tax strategies," says Marguerite Griffin, national director of philanthropy at Chicago-based Northern Trust Personal Financial Services.

Yes, no, maybe

The Economic Growth and Tax Relief Reconciliation Act of 2001 implemented a phased-in increase in the value of an individual's transferable assets at the time of death without incurring estate taxes. Prior to EGTRRA, the exemption amount was $675,000. EGTRRA increased the exemption in stages -- $1,000,000 in 2002, $2,000,000 in 2006, $3,500,000 in 2009 -- through 2010, when the estate tax disappears altogether.

When EGTRRA was formulated early in 2001, it looked like that would be it: after 2009, the federal estate tax -- as distinct from state levies -- would disappear. In fact the only thing that kept Congress from killing the tax altogether was a bit of mid-1990s fiscal-austerity legislation that makes it difficult to pass laws touching the budget in anything more than 10-year increments.

And now, with the public debt and deficit coming under scrutiny again, it seems likely that the estate tax will make a re-appearance in 2011.

Griffin says one reason for the predicted downturn in giving is ignorance about how charitable giving can be an integral part of philanthropic planning. Only 41% of respondents felt that they were knowledgeable about the field, and only 28% viewed charitable donations as a worthy tax reduction technique.

"Education is the key to guiding how families establish and preserve their legacy," says Griffin. "We may suggest that one client start a donor-advised fund while another create a family foundation. The key is in knowing your objectives and how each charitable vehicle fits with those objectives."

Whippersnappers

In 2006, 44% of respondents had said that they would increase their charitable donations, but that number has come down to 27% in the 2007 survey. Only 37% of millionaires are even making charity a part of their household budget, down from 53% in 2005.

Instead, charitable bequests are becoming the most common method of donation, with around 25% of all high-net-worth households including a bequest in a will. With deca-millionaires, though, there is more emphasis placed on leaving wealth to heirs than with other wealth segment; 72% of deca-millionaires surveyed said that they would leave a "sizable" estate to others.

As a result, 35% of high-net-worth households are looking at a significant inheritance, averaging over $200,000, and one in four valued at least at $1 million. These inheritances are mostly invested in securities or real estate.

The Northern study -- which is based on a poll of more than 1,000 millionaire households --also suggests that "gen-x" millionaires -- those between 27 and 41 -- are giving more than their boomer and Depression-era counterparts. More than a quarter of gen-x millionaires donated over $20,000 in 2006, as compared to the 15% of boomer and 12% of over-60 millionaires who gave at least as much last year. Gen-x millionaires are also more likely than other age groups to increase their donations in 2007.

Northern has 84 offices in 18 U.S. states and 13 international offices. It had assets under custody of $3.8 trillion and assets under management of $756 billion at the end of March 2007. -FWR