Craig C. Wruck August 6, /06/2012

Transcription

1 Craig C. Wruck August 6, 2012 Economics and the environment for charitable giving Mechanics of the charitable deduction and the after tax cost of giving Political realities, public trust, and an abject lesson in reputation vs. character Legislative outlook for the charitable deduction 1

2 Foundations Corporations 13% 5% Bequests 7% Individuals 75% Giving USA -10.0% -5.0% 0.0% 5.0% 10.0% Total Individual Bequest Foundation Corporate Cumulative 2

3 3 Cash 2% Stock & Bonds 31% Real Estate 44% Personal Property 12% Retirement Accounts 10% Census Bureau Current Dollars 2010 Dollars

4 Giving as % of Personal Income Giving as % of GDP /69-11/70 1/73-3/ /80-7/81-7/90-3/01-7/80 11/82 3/91 11/01 Tax Rate Increases Tax Rate Reductions Major Recessions Individuals Bequests Foundations Corporations 4

5 20% Recession Recession Recession /11 10% 0% 10% 20% 30% 40% GDP S&P 500 Total Giving Reliability Government high United Way Individual Gifts Memberships Endowment medium Planned & Major Gifts Program Fees low Foundation Grants (project) low medium Foundation Grants (operating) Autonomy high 5

6 Reliability high medium low Government United Way Planned & Major Gifts Foundation Grants (project) low medium Individual Gifts Memberships Program Fees Foundation Grants (operating) Autonomy high Endowment Amount contributed minus Taxes saved or avoided equals Cost of gift 6

7 Gross income minus Adjustments equals Adjusted Gross Income (AGI) Personal exemptions minus Individuals with AGI up (2012: $3,800 per person) to $9,750 or a family of four with AGI up to Deductions itemized or $27,100 will have no minus standard (2012: $5,950 single, taxable income $11,900 joint) equals Taxable income Rates apply to taxable income Rates range from 10% to 35% Effective rate is less than marginal rate Charitable deductions reduce taxable income at the highest marginal rate 7

8 Taxable Income : Tax Rate $1 to $17,400 : 10% $17,401 to $70,700 : 15% $70,701 to $142,700 : 25% $142,701 to $217,450 : 28% $217,451 to $388,350 : 33% $388,351 or more : 35% Taxable income $160,000, filing jointly in 2012: $17,400 Taxed at 10% = $1,740 $53,300 Taxed at 15% = $7,995 $72,000 Taxed at 25% = $18,000 $17,300 Taxed at 28% = $4,844 TOTAL TAX $32,579 Marginal Tax Rate = 28% Effective Tax Rate = 20% ($33k/$160k) 8

9 Largest rate disparity: 34x 1917: 2% vs. 67% 100% 90% 80% Largest bracket disparity: 2,500x 1941: $30k to $76.5M in 2011 dollars Highest rate ever: 94% taxable income over $2.6M in 2011 dollars 1966: 36 brackets : 2 brackets 70% 60% 50% 40% 30% 20% 10% 0% top rate bottom rate Linear (top rate) Linear (bottom rate) Capital gain: profit on sale of an investment Long-term capital gains: held a year or more Long-term capital gain tax: maximum 15% Short-term capital gains: held less than a year Short-term capital gains: taxed as ordinary income Capital gains tax is avoided on transfer of long-term capital gain property to charity 9

10 Assume a donor makes a contribution of $10,000, either cash or appreciated securities with basis of $2,000 ($8,000 gain): Cash Securities Top tax rate 28% 35% 28% 35% Contribution 10,000 10,000 10,000 10,000 Income taxes saved 2,800 3,500 2,800 3,500 Capital gains tax saved 0 0 1,200 1,200 After-tax cost of gift $7,200 $6,500 $6,000 $5,300 Discount 28% 35% 40% 47% 27% of households itemize Itemizers make more than 68% of contributions Overall, those who claim a charitable deduction give nearly twice the percent of income as those who do not For incomes over $100,000, itemizers give more than three times the percent of income as those who do not 10

11 73% do not itemize 94% with incomes over $100,000 do itemize 91% with incomes less than $30,000 do not itemize Itemizers support different causes than the majority of tax payers Good or real versus bad or boutique charities Commercialism by charities Efficacy of endowments Perceived abuses of tax exemption 11

12 2004 & 2005: hearings examine abuses of charitable deduction, tax exempt status Proposed legislation increasing reporting & accountability requirements aimed at perceived abuse of tax exempt status and the charitable deduction already implemented changes to vehicle donation programs, donations of clothing initially proposed an omnibus bill, instead adopting reforms piecemeal Only 15% express a great deal of confidence in the ability charities to manage their contributions In the 1990s more than 25% expressed a great deal of confidence Comparable to the public confidence level in HMOs, the media, and Congress 12

13 Insurer Owner Insured Beneficiary Promises to pay an amount of money (the death benefit) upon the death of the insured Buys and (usually) pays for the policy; has right to change beneficiary and to give away ownership The one upon whose death the insurer will pay the death benefit The one to whom the death benefit will be paid 100,000 insureds, all the same age, $50,000 death benefit Age Probability of Death Number Dead Total Death Benefit Paid Cost Per Policy $7,140,000 $ $11,615,000 $ $27,560,000 $ ,141 $57,035,000 $ ,558 $127,895,000 $1, ,446 $322,285,000 $3, ,401 $870,065,000 $8,

14 Vanishing Premium Term Insurance P R E M I U M Variable / Universal Whole Life AGE OF INSURED Definition of scheme 1. a mathematical diagram; a representation of the astrological aspects of the planets at a particular time; a graphic sketch or outline 2. a plan or program of action; especially : a crafty or secret one 14

15 Life Insurance Outright Gift Charity Death Benefit Insurance Company Insurance Policy Pays Premiums Insurance Policy Commissions Donor Sells Policy Insurance Agent Premium Arbitrage Charity Insurance Policy Premium Payments Death Benefits Cryptic Insurance Company Insurability Donor Purchase Payment Annuity Payments Sells Policy & Annuity Acme Insurance Company Insurance Agent Commissions 15

16 Premium Financed Insurance Charity Insurance Policy Premium Payments Death Benefits Insurance Company Insurability Funds Commissions Repayments Donors (many) Lender / Investor Sells Policies Insurance Agent Oklahoma State Univ. & T. Boone Pickens Cowboy Athletics purchased 27 $10 million policies on willing alumni and supporters Projects eventual proceeds of $350 million $16.6 annual million premiums to be paid with contributions & premium financing $33.2 million premiums paid in 2007 & university seeks to cancel policies and demands refund of premiums paid 16

17 IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION THE LINCOLN NATIONAL LIFE : INSURANCE COMPANY, : : Plaintiff : : CIVIL ACTION NO. v. : 3 10CV 173 P : COWBOY ATHLETICS, INC., : : Defendant : 2010 insurer sues, university countersues alleging misrepresentation regarding: Availability of financing for premiums Anticipated mortality of insureds Payment of $10.9 million in commissions 2012 Court finds for insurer: University agreed to the plan and accepted the underlying assumptions when it received the policies and paid premiums Insurer can keep $33.2 million in premiums University must pay costs of litigation incurred by insurer and insurance brokers 17

18 2010 insurer sues, university countersues alleging misrepresentation regarding: Availability of financing for premiums Anticipated mortality of insureds Payment of $10.9 million in commissions 2012 Court finds for insurer: University agreed to the plan and accepted the underlying assumptions when it received the policies and paid premiums Insurer can keep $33.2 million in premiums University must pay costs of litigation incurred by insurer and insurance brokers A) Just say no B) Don t ask don t tell C) Hear no evil D) It s a miracle 18

19 Guaranteed insurance is exceedingly rare Compare projected values to guaranteed values Carefully evaluate proposed insurance schemes Value and values Time to decide Nothing is free Charitable interest Obligations and commitments July 25, 2012 OSU appeals judgment in Gift plan By Russell HixsonStillwater NewsPress STILLWATER, Okla. Cowboy Athletics Inc. filed a certificate of appeal Monday in response to summary judgement that blocked its attempt to recover $33 million. taking out life insurance failed on Gift aging fundraising plan supporters plan Oklahoma State University officials said a month ago that the university would appeal the ruling against OSU and its top booster, T. Boone Pickens, and their attempt to recover about $33 million in life-insurance premiums in the failed Gift of a Lifetime fundraising plan. The program involved taking out life-insurance policies on 27 aging school supporters with the university as the beneficiary. Pickens and Oklahoma State University s athletic fundraising foundation filed the Payne County lawsuit in 2010, alleging agents for the insurance company used manipulated data and inflated the benefits of the life insurance strategy. Associate District Judge Stephen Kistler ruled in favor of Lincoln National Life Insurance Co and several co defendants this week 19

20 1913: Federal Income Tax enacted 1917: first charitable deduction limited to 15% of taxable income 1924: 100% deduction for those who contribute 90% or more of taxable income 1969: current 50% / 30% AGI limits replace the 15% / 100% limits : limited deductions temporarily allowed for non-itemizers The charitable deduction is politically difficult to defend: deductions benefit the wealthy Taxpayers will react to changes in the law by adjusting their behavior to account for increased costs of giving The poor, the needy, and others who benefit from charitable organizations will be most directly affected by reductions in tax incentives for charitable giving 20

21 Senate 100 seats Democrats hold majority, but not control House of Representatives 435 seats Republicans have solid control A Congress runs for two years To become law legislation must be: Introduced in each chamber Referred to committee for study and action Passed in identical form by a majority vote Signed by the President All within the two-year term of a Congress Ways & Means Committee Chair: Dave Camp Senate Finance Committee Chair: Max Baucus 21

22 Tax reform How extensive? Will Bush Tax Cuts be allowed to expire in 2013? Will we maintain a progressive tax system? The new logic: reduce tax code spending to increase revenue without increasing taxes Continuing concern and growing acceptance of abuses as the norm New questions about fairness and effectiveness of charitable deduction Non-profit reform a legislative trifecta Consider gift of $10,000 FMV stock with $2,000 basis from a donor in the highest tax bracket: Proposed Contribution $10,000 $10,000 $10,000 Income Tax saved 3,960 3,500 2,800 Cap Gains Tax avoided 1,600 1,200 1,200 After Tax Cost of Gift $4,400 $5,300 $6,000 The real after tax cost of this contribution has increased $1,600, or 36% 22

23 Calls to Cut Spending in the Tax Code and to reduce Tax Expenditures Option 1 The Zero Plan Eliminate all tax expenditures (e.g. all itemized deductions) Option 2 Reform Limit charitable deduction with 2% AGI floor Triple Standard Deduction amount Establish three rates: 15%, 25%, and 35% Capital gains & dividends taxed as ordinary income Shelved for lack of consensus at end of 2010 A tax subsidy that: Costs the treasury $46 billion per year Is not equitable Subsidizes wealthy taxpayers more than others Subsidizes charitable giving to some organizations (chosen by the wealthy) more than others 23

24 AGI under $100,000 3% 1% 7% 3% 10% 9% 67% Religious Combined Appeal Social Service Health Education Arts Other AGI $100,000 to $200,000 6% 2% 6% 12% 6% 57% Religious Combined Appeal Social Service Health Education Arts Other 11% 24

25 15% AGI $200,000 to $1 million 8% 23% 11% Religious Combined Appeal Social Service Health Education Arts Other 32% 5% 6% AGI Over $1 million 10% 17% 15% 4% 4% Religious Combined Appeal Social Service Health Education Arts Other 25% 25% 25

26 Retain deduction for itemizers only but establish floor (either $500/$1000 or 2%) Allow all taxpayers to claim deduction (with or without a floor) Replace deduction with a credit (at either 25% or 15%) with or without a floor All options would reduce charitable giving but the reduction in giving would be less than the reduction in subsidy would reduce both the total amount donated to charity and the total federal tax subsidy but the reduction in the subsidy would exceed the reduction in charitable contributions thus increasing federal revenue 26

27 The charitable sector promotes and ensures the well-being and vitality of the nation. Reduction in tax incentives for charitable giving will produce catastrophic consequences for the public by crippling the charitable sector. NCPG Resolution, 1998 Donors are plentiful even if they cannot give as often Americans are generous especially at the lower end Donors are willing to consider unusual gifts Tax changes may provide new opportunities New attitude of community aligns with philanthropy 27