Capitol Hill watchers in the United States anticipate that President George Bush will call for a permanent repeal of the estate tax as part of his overall tax reform plan that will go before the new Congress.  When the White House first raised the issue in 2001, the non-profit sector debated the impact that the measure would have on philanthropy. However, the sector never reached a consensus and, therefore, the debate rages on. Fortunately, regardless of which way the new Congress decides the issue, there are three simple things every non-profit can do to maximize planned giving results.

Double Taxation? 

The estate tax in the U.S. is being phased out through 2010. However, without further action from Congress, the so-called death tax will be fully reinstated in 2011. Those favoring the elimination of the estate tax argue that Congress created it to pay for World War I and that the tax has long since outlived its original intended purpose. They further argue that the tax often amounts to a double taxation of assets since individuals paid tax when they first earned the money. In addition, proponents of elimination say that many small businesses and family farms suffer because of the tax, since heirs inherit an ongoing business, rather than the cash necessary to pay the tax on the value of the business.

Redistributing wealth for the common good? 

Those who want to keep the estate tax argue that wealthy Americans have benefited from society’s infrastructure and, therefore, owe something back. They also see the estate tax as a method to redistribute wealth for the overall good of society. Given the current budget deficit in the U.S., they further argue that this is not the time to think about further reduction or elimination of any taxes. 

How will non-profits be affected? 

Just as members of Congress debate the issue in broad terms, the third sector has been analyzing how a permanent repeal of the estate tax will specifically affect non-profit organizations. A recently released study from the Congressional Budget Office (CBO) found that if the estate tax were eliminated in 2000, charitable giving would have been reduced by a staggering $25 billion in that year alone. The report is based on a variety of assumptions including the assumption that tax incentives are a powerful motivator for planned gifts of all types, including bequests. 

Those who advocate for the elimination of the estate tax find the CBO report interesting but far from conclusive. Even the CBO acknowledges that it based its report on a variety of assumptions. If any single assumption were to change even slightly, the report’s forecast could be drastically altered up or down. However, even if the report is accurate, it really only looked at what would happen to charitable giving in the generation passing. More difficult to forecast is how much an heir would contribute to charity upon receiving a windfall inheritance. Because charitable giving most closely correlates to personal income, and disposable income at that, there is every reason to believe that a decline in planned giving contributions from the deceased would be at least partially offset by increased giving from the heir. 

Could eliminating the Estate tax stimulate the economy? 

Estate tax opponents also argue that elimination of the tax would allow heirs to have more capital to invest into business growth and economic development. With economic growth and more jobs, individuals would have more money to contribute to charitable causes. They argue that a repeal of the estate tax could actually increase overall giving though the method of giving might take a different form. As GDP grows, so does philanthropy. 

The Compromise Position 

In recent weeks, a compromise position has begun to emerge on the issue. Diana Aviv, chief executive officer of Independent Sector, and Robert Greenstein, founder and executive director of the Center on Budget and Policy Priorities wrote in The Chronicle of Philanthropy that Congress should consider retaining the estate tax only for the absolute wealthiest Americans, those with estates valued above $3.5 million. The tax would then only affect 0.5 percent of all estates. They argue that this would address many of the concerns of those in favor of full repeal, while protecting the non-profit sector.  

Tax Incentives Not a Great Motivator 

Some development officers rely heavily on tax incentives to motivate planned giving prospects to make a commitment. However, wise development professionals recognize that while donors appreciate tax benefits, donors are primarily motivated by the cause itself. The National Committee on Planned Giving found that 97 percent of bequest donors and 98 percent of annuity donors were motivated by the charitable cause itself rather than other reasons including tax incentives. Perhaps this is why philanthropy in the U.S. was alive and well before the 1917 introduction of the estate tax. 

Three Must Dos: 

Regardless of what Congress ultimately decides to do with the estate tax, non-profit organizations will need a three-prong strategy to remain or become successful in the area of planned giving:

1. Develop a Strong Case for Support. An organization’s mission matters. As NCPG’s study found, mission motivates donors. Building a strong case for support will help donors understand the need for their support and how their gift can have a lasting impact. An effective case statement that is used for planned giving purposes can even inspire planned gift prospects to increase their annual fund support. It may seem simple, but amazing things really do happen when donors know what good their philanthropy will do.

2. Create & Deploy Cutting-edge Marketing Plans. The old adage is, “Build a better mousetrap and people will beat a path to your door.” Unfortunately, it is simply not true. Building a better mousetrap is meaningless unless people know about it and understand how it will help them realize their own vision. While the non-profit sector has become increasingly sophisticated at marketing capital and annual fund campaigns, planned giving programs are often marketed using antiquated techniques. Successful organizations have cutting-edge marketing plans that take advantage of a wide array of tools to communicate effectively with appropriate prospects.

3. Ensure an Ongoing Commitment to Stewardship. The most effective development professionals invest in sound stewardship. Current donors only make good planned giving prospects if they have been well stewarded. Planned giving donors will only maintain and increase their support if properly stewarded; this is particularly true with those who arrange a bequest. Securing a bequest commitment is not the end of the process; it is in many ways the beginning. Stewardship is essential to ensure that the charity stays in the donor’s will, to maximize the bequest commitment, to solicit irrevocable planned gifts, and to secure current gifts. Stewardship involves tailored, appropriate communications. It also means reminding the donor how the organization will use their gift to achieve the goals about which the donor is passionate.

Conclusion:

The new Congress may or may not permanently repeal the estate tax. Congress might even reach a compromise and retain the estate tax for only the absolutely wealthiest. However, regardless of what action the American federal government takes, wise non-profit organizations will continue to attract support. These organizations will be successful because they have a strong case for support, an innovative marketing plan, and personalized stewardship efforts. No matter what the tax policy will be, success will only belong to those development professionals who rely on more than tax incentives to inspire giving.