Rethinking Charitable Giving in the Era of Extended Tax Cuts: Strategies for Fundraisers

In recent years, tax policy in the United States has undergone significant changes, most notably through the Tax Cuts and Jobs Act (TCJA) enacted in 2017. This legislation brought about substantial reductions in individual and corporate tax rates and significantly increased the estate tax exclusion amount. As discussions around the extension of the TCJA begin to take shape, fundraisers and non-profit organizations are faced with a unique challenge: encouraging charitable giving without relying heavily on the estate tax deduction as a motivating factor.

The Landscape of the Trump Era Tax Cuts

Until about 3 seconds ago, we have been reading everywhere about the pending sunset of the TCJA and what that would mean for the federal estate tax exemption amount. The TCJA raised the estate tax exemption from approximately $5.49 million to what will now be $13.99 million per individual (and $27.908 million for married couples) for 2025 with possibility that the federal estate tax might go away altogether or continue to increase to the point that it becomes all but irrelevant. This means that most individuals are no longer subject to estate taxes, reducing the urgency to make estate-planning decisions based on tax implications alone. As the possibility of extending these favorable tax provisions is more likely than ever, fundraisers must recognize that the traditional arguments for including charitable gifts in estate plans may not resonate as strongly as they once did.

Shifting the Focus: Motivations Beyond Tax Deductions

With a high estate tax exclusion, fundraisers must pivot their messaging to underscore the intrinsic value of philanthropy and the impact of charitable contributions. We all know that tax deductions have never been the sole driving factor for people to become philanthropists, but this is an excellent opportunity to review several compelling motivations that can inspire prospects to consider charitable gifts in their estate plans:

1. Legacy Creation: Many individuals are motivated by the desire to leave a lasting legacy. Fundraisers can emphasize how charitable gifts can create a meaningful impact in their community or support causes they are passionate about. This legacy can extend beyond financial contributions, as it embodies the values and principles that individuals wish to pass on to future generations.

2. Personal Fulfillment: Charitable giving often provides a sense of personal fulfillment and satisfaction. Fundraisers can highlight stories of how contributions have transformed lives or communities, reinforcing the emotional rewards of giving. This approach appeals to the human desire to make a difference and connect with others.

3. Community Impact: Emphasizing the direct impact of charitable gifts on local communities can resonate with prospects. Fundraisers can share specific examples of how donations have funded important programs, services, or initiatives that address pressing societal needs. Highlighting tangible outcomes can motivate prospects to contribute for the greater good.

4. Alignment with Personal Values: Many individuals are driven by a desire to support causes that align with their personal values and beliefs. Fundraisers can engage prospects by discussing how their contributions can further the missions of organizations they care about. This alignment can create a strong emotional connection to the cause.

5. Tax Implications Aside from Estate Tax: While there might not be a federal estate tax to worry about, that doesn't mean there are no tax considerations. Taking the top spot is the income tax liability that remains on all IRD assets. IRD, or Income in Respect of a Decedent, refers to certain types of income that a deceased individual was entitled to receive but did not receive before their death. These assets are an important consideration in estate planning and taxation, as they impact the tax obligations of heirs even if they don't impact the tax obligations of the estate itself.

Common examples of IRD assets include:

1. Retirement Accounts: This is the elephant in the room. Funds in traditional IRAs, 401(k) plans, and other tax-deferred retirement accounts that have not been withdrawn before death. Due to the Secure Act 2.0, most non-spousal beneficiaries must draw down the full account in ten years. This most often affects children who are inheriting an estate from their last surviving parent, but any individual, spouse or otherwise, who inherits these assets will pay income tax on 100% of received distributions

2. Interest and Dividends: Interest on bonds or dividends on stocks that were declared but not yet paid to the decedent.

3. Unpaid Wages: Any salary or wages that the decedent earned but had not yet been paid at the time of their death.

4. Deferred Compensation: Payments due under employment contracts or pension plans that the decedent had not received.

5. Royalties: Income from royalties that had accumulated but were not paid out before the decedent's death.

IRD assets are subject to income tax when they are received by the beneficiary. This means that while the estate may not pay income tax on these assets, the heirs will need to report the income on their tax returns and pay the applicable taxes. It's important for beneficiaries to be aware of these tax obligations to avoid unexpected tax liabilities. Considering that beneficiaries are often among their top-earning income years when inheritances occur, that income tax liability can be crushing.

When it comes to estate planning, and specifically charitable gift planning, understanding IRD assets is crucial. Proper planning can help minimize the tax impact on heirs by selecting the right assets to direct to charitable causes and which assets to direct to individual heirs. It is critical that prospects and donors are aware of the taxable nature of each type of asset within their estate when they might be under the false impression that there are no tax liabilities due to the very high federal exemption number.

As the potential extension of the TCJA continues to shape the philanthropic landscape, fundraisers must adapt their strategies accordingly. Relying solely on tax deductions as a motivator for charitable gifts in estate planning may no longer be effective. Instead, by emphasizing legacy, personal fulfillment, community impact, alignment with values, and drilling down a bit further to understand other underlying tax implications, fundraisers can inspire prospects to include charitable gifts in their estate plans. In doing so, they can cultivate a culture of giving that transcends tax incentives, ultimately benefiting both donors and the causes they support.