Social And Tax Implications Of Planned Giving [Journal of Applied Business Research]
By Smith, Amanda | |
Proquest LLC |
ABSTRACT
Americans have a rich and long history of engaging in philanthropic endeavors, particularly in comparison to other Western nations. Their motivations range from being altruistic and self-sacrificing to wanting to reduce their tax liability before and after death. This paper explores the motivations behind giving as well as the trends surrounding planned giving, including gift annuities, donor-advised funds, and foundations.
Keywords: Charitable Giving; Tax Deduction; Social Aspects of Planned Giving; Philanthropy
HISTORY OF PLANNED-GIVING AND TAXATION IN
The American tradition of private phtianthropy has been established in academic literature. Curti (1958) makes a well-researched case for a history of volunteerism, giving to religious and educational institutions, and the middle-class organization of efforts to aUeviate the suffering of fellow citizens to be a part of the "national character" of
It was about this time that another projector, the Rev.
America's dedication to volunteerism was noted in the 1830's by French political and economic thinker, Alexis de TocqueviUe, in the classic commentary Democracy in America:
The Americans make associations to give entertainments, to found establishments for education, to build inns, to construct churches, to diffuse books, to send missionaries to the antipodes, and in this manner, they found hospitals, prisons, and schools. If it be proposed to advance some truth, or to foster some feeling by the encouragement of a great example, they form a society. Wherever, at the head of some new undertaking, you see the government in
While professional fundraising for charitable organizations was still in its infancy in the early 20th century,
In
Eisenstein (1956) states that death taxes are ancient taxes. They were known to the Egyptians, as well as the Romans and Greeks. Even the complaints about them have a venerable pedigree.
Kopczuk and Slemrod (2003) observed that:
Evidence from estate-tax returns suggests that some people will themselves to survive a bit longer if it will enrich their heirs. They further remarked, "We cannot rule out that what we have uncovered is not real death elasticity, but instead ex post doctoring of the reported date of death to save on taxes. Even in that case, this exercise provides evidence on how the attempt to collect taxes can engender resource-using avoidance responses that reduce tax revenue.
Tax deductions for charitable donations have been subjected to criticism since their introduction in the tax code. Several arguments assert that the costs involved in tax deductions are not equitable or are insufficient for either the needs of the public or private society. The subsidy theory promotes that the tax-exempt organizations are providing services that are not being adequately offered by either the private market or government agencies. Hence, the tax incentive to the donor is an integral part of accomplishing various societal goals.
Alternatively, a tax-base theory suggests that deductions are allowable simply because a tax has been imposed on income. A third theory - community income - proposes that a more specific exemption replace individual deductions because charities not only help to produce community income, but exist wholly to serve groups of people that come together for a common reason or goal (Buckles 2005).
MOTIVATIONS FOR GIVING: UTILITARIANISM VS. WARM GLOW
As would be expected, motivations for charitable giving vary greatly.
Sugden (1982) noted that private phüanthropy relied on three principal assumptions. The first was a concept of "publicness assumption," and stated that charitable activity occurred, in part, because there was the potential that some public good and utility would be produced. The second assumption was that of "utility maximization." This idea proposed that an individual had a personal objective to maximize his or her utility in giving. The final assumption used Nash conjectures - an aspect of game theory where each player is assumed to know the equilibrium strategies of the other players. In this example, donors would take other philanthropic contributions in charitable activity into consideration.
Sugden (1982) concludes that the generally-accepted idea, even among capitalists, that some government intervention is necessary because private philanthropy is insufficient to meet the needs of society is "paradoxical, implausible, and insistent with empirical evidence."
Karlan and List (2007) explored an aspect of Sugden's utility maximization and Nash conjecture theory in fundraising and found that "The 'supply side' of the economics of charity typically utilizes a model of charitable giving that treats donations no differently from any other consumer purchase. In this view, changes in tax deductibility emulate a change in the price of donating." In their experiment to test cost-benefit analysis, the authors showed that a leadership match of
Other researchers have focused less on the utilitarian aspect of giving and more on altruistic motives of donors. Ribar and Wilhelm (2002) remarked that an important part of utility was derived from a "private joy of giving" or a "warm glow." In discussing fundraising cost, efficiency, and competition, they remarked, "An increase in efficiency reduces the organization's own giving price, raises the implicit price of contributions to 'competitor,' and consequently increases contributions."
While it is generaUy assumed that wealthier individuals give more, research has shown that giving among individuals with average income stands at a higher percentage of their income regardless of stronger religious affiliation, age, or the cost of giving. Finally, Wiepking (2007) suggests that, "If people earning higher incomes understand how miserly their gifts compare to the donations of those with lower income, it is possible that they will be prepared to donate more substantial amounts."
Donors have a mix of motivations in giving that include altruism and a desire to maximize utitity that extends beyond a one-time gift with the perception of a minimum impact. Often a donor wants to help a cause or a group, whose needs are not being currently addressed, by establishing a charitable foundation. The foundation takes care of administration, legal due düigence and regulatory paperwork, while the donor instructs where the money should be donated. An attractive option for wealthier individuals is the visible legacy of a family foundation. A charitable foundation allows the donor to retain control over what gifts are made, to whom, and how often. Such fiexibitity may be appealing for reasons related to the reduction of tax liability before and after death, as well as the desire for donors to feel like they are maximizing their philanthropic goals.
The
The report also concluded that "Donors are often motivated to include charities in their wüls to avoid payment of taxes. However, this study found that the avoidance of taxes through bequest giving was not a primary factor in giving to specific organizations." Households with affluent chüdren who are college educated have a lower probability of having a bequest motive.
CREATING A LEGACY THROUGH GIFT ANNUITIES, DONOR-ADVISED FUNDS, AND FOUNDATIONS
There is no shortage of investment strategies for Americans with goals of reducing their estate tax liability while creating a legacy. Gift annuities allow a donor to make a substantial gift to a charitable organization today while receiving an annuitized return for the remainder of his or her life.
For donors, the motivations for considering a charitable gift annuity are complex. While many older Americans have a desire to be generous, they are also concerned about their own uncertain economic future. However, the choice of participating in a gift annuity through a favorite charity paying 5 or 6% can be an astate financial decision in times of low yields in Money Market Funds, Certificates of Deposit, and Savings Accounts.
Although Foundations work weU for large bequests, the administrative costs for foundations holding assets of
Donor-advised funds often take the form of a community foundation, allowing an individual to make a taxdeductible gift today with the option of adding to it in the future as a part of their estate plan. While the gift is irrevocable and the donors lose some control over which charities benefit from their gift, the donor's wishes are honored to the best of the fund's ability. Donor-advised funds have experienced explosive growth recently and are likely to become the default choice for planned giving.
IMPLICATIONS FOR FUTURE PLANNED GIVING
Ever-changing income and estate tax laws, the state of the economy, a desire to preserve wealth for chüdren and grandchildren and to leave a meaningful legacy to a charitable organization are all determinants in endof-life giving. The
Widespread demographic changes are also important to note. James (2009) studied the dieory of the upcoming "windfall" and "flood" of gifts that many charitable organizations expected with the "graying" of the American population. He concluded that the estate giving of the wealthy was often diverted from charitable organizations toward private foundations, justifying that total lifetime giving was far greater than gifts received after deatii. Estate gifts can provide an important cushion to allow nonprofit organizations time to find replacement donors to make up the loss in annual giving. However, estate gifts, by themselves, do not fully make up for the mortality-related loss of annual giving and volunteering. Furthermore, the offsetting opportunity cost is very real, even if the nonprofit eventually recruits new living donors.
James (2009) emphasized that the presence of children or grandchildren played an important role in determining whether a bequest was made to a charitable organization or not. Less than only 10% of current donors with a wiU or trust who had grandchildren also included any charitable provision.
When it comes to the goal of creating legacy gifts, individuals have several options that allow them to maximize their donations. Fundraisers and other nonprofit leaders who understand price sensitivity of donations, demographic shifts, and economic changes can respond by providing flexible giving options to meet die needs of donors. Knowledge of an individual's utilitarian and altruistic motives for giving can also help gift-officers better understand potential donors.
REFERENCES
1. Buckles, Johnny. (2005). "The Community Income Theory of the Charitable Contribution Deductions."
2. Curti, Merle. (1958). "American Philanthropy and the National Character." American Quarterly. 10. 4:420437.
3. de Tocquevüle, Alexis. Democracy in America.
4. Eisenstein, Louis. (1956). "The Rise and Decline of the Estate Tax." Tax Law Review. 11,223-259.
5. Franklin, Benjamin. Autobiography and Other Writings.
6. Giving
7. James, Russell. (2009). "Health, Wealtii, and Charitable Estate Planning: A Longitudinal Examination of Testamentary Charitable Giving Plans." Nonprofit and Voluntary Sector Quarterly. 38.6: 1026-1043.
8. James, RusseU. (2009). "The Myth of the Coming Charitable Estate Windfall." The American Review of
9. Karlan, Dean and List, John. (2005). "Does
10. Kopczuk, Wojciech and Slemrod, Joel. (2006). "Dying to Save Taxes: Evidence from Estate-Tax Returns on the Death Elasticity." The Review of Economics and Statistics.85.2: 256-265.
11. Ribar, David C, and
12. Sugden, Robert. (1982). "On the Economics of Philanthropy."
13. Wiepking, Pamela. (2007). "The Philanthropic Poor: In Search of Explanations for the Relative Generosity of Lower Income Households." Voluntas. 18:339-358
AUTHOR INFORMATION
Dr.
Copyright: | (c) 2011 Clute Institute for Academic Research |
Wordcount: | 2650 |
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