Charitable Gift Planning News

Volume  6, No.  8, August  1988

Planners’ forum

The Morning of...

© Lynda S. Moerschbaecher, 1988 (now known as Lynda L. Sands)


You look at the clock—it's 6:13 a.m. You roll over, trying to push out of your mind that today is September 11, 1998. But the thought reverberates through your sleepy brain and keeps you from catching that extra five-minute snooze. Fatigued, you roll out of bed, and then the full memory of it hits you--today is the day the new law takes effect. The President signed his first piece of major tax legislation since his election in 1996. It completely repeals the income tax and the estate and gift tax and institutes a new consumption tax. Obviously, that means there are no such things as deductions or credits. No charitable deduction. No concept of income, or tax-exempt income, or tax-exempt trusts. Now every citizen is required to file by December 31 an FS-1, a Financial Statement-1, listing all assets and liabilities.

You can hardly believe it—registering everything you own with the government—anything with a value in excess of $100. As you step into the shower, your first thought is whether people will cheat. Then you wonder whether they will know enough about the system to know how to cheat. But the newspaper accounts have prominently displayed statistics that, with the number of revenue agents hired under the income tax system, and considering the far greater simplicity of the FS-1 and the subsequent yearly FS-2's, 57.2% of all returns will be audited (compared to 1.2% under the income tax system). Of the remainder of the FS's filed every year, 35% will be checked electronically and compared with the sellers' and vendors' electronic transaction records of any item over $100. The computer simply scans and compares the two records by federal ID number. The remaining 8% or so are sent to the new Investigative Division, not because foul play is suspected, but simply as a means to study in depth the "voluntary compliance" with the new tax law.

Voluntary compliance. That phrase has always made you chuckle. You had as much choice to file or not as this bathroom rug under your wet feet. Supposedly, that's what our income tax system was based on. Well, if that's true, how did we ever get those appraisal requirements for gifts in 1985? And, remember, by 1988, art work valued over $20,000 had to be accompanied by an 8"xl0" glossy? Then, in 1992, every appraisal form had to be accompanied by a video of the appraiser in the process of appraising, explaining every step and swearing under penalty of perjury that every step was true and accurate. No wonder so few appraisers would work in the charitable field. Were there really so many abuses that this system was necessary?

On the magnetic commute lane, you doze off a little at first, then figure you'd better take a look at the morning news. The screen is already on; you turn up the volume. Every voice article you tune in is about the new tax law. Weren't there any plain, old-fashioned murders or kidnappings? The commentator says dryly, "The yearly FS-2 will require you to show the changes in your income, asset, and value-of-usage position from year to year. The financial amount representing the change is considered your tax base. That base times the 35% rate is the tax due. So the change in your financial status each year is the measuring device."  It's easy to see the appeal to it; no long 1040's or 706's. No double tax systems, lifetime, and death-time. Your last FS-2 is it; no such thing as estate tax. No complicated rules and forms. No special preferences. It's a pretty tidy system. Congress knew the change might cause severe economic dislocation for a few years. Nevertheless, they decided it was worth it in the long run. Public reaction wasn't nearly as optimistic; almost everyone felt the FS's would be far more "invasive and intrusive" into personal affairs.

The little bump brings you back to reality; you realize that the mag has dumped you at your parking stack. These tax worries have really been plaguing you in the past few days—and rightly so.  No one knows or can even guess the effect this will have on charitable giving. You contemplate this gloomily as you turn into your parking stall electronically coded for Development Office. The beam scans your development office-issued sticker for a match and flashes green. If it hadn't, a silent alarm system would have alerted security and your car would have been gone in ten minutes. You thought parking stacks were congested! Try to get out of a tow stack in time to catch some sleep at night.

You walk down the hall to the development office just a little slower than usual today—no perk in your footsteps. It's 9:01, and as you open the door to the office, you try to avoid the long faces and grim stares. Eyes follow your movements as you walk to your office and silently close the door. You pull up your chair and put your head in your hands and just think for a minute. You worked so hard all these years to become Vice-President for Development, finally getting the job six months ago. Now what? You're responsible for a large office—three major gift officers, four annual fund officers, two special events coordinators, one corporate/foundation person, two planned giving officers, a gift administrator, and quite a few secretaries and clerks. Do they even have jobs as of today? Do you? Who knows if you can achieve any substantial gift revenue over the next several years? And planned giving was supposed to be the savior of our development future!

You've scheduled a staff meeting for 10:00 a.m. today to discuss the problems the hospital confronts. When you look up from your thoughts, you notice the clock on your bookshelf--it's 9:29. Where did the time go? What will you say to your staff? It's hard when you know how many families rely on your leadership. Ironically, right under the clock, your eye catches a glimpse of several series of planned giving reference books--all geared to the financial benefits of an income tax system. Hah! Obsolete in the stroke of a presidential pen. You laugh to yourself in a sad, cynical manner about the "house that Jack built" called planned giving.

You think, how many people even know what a consumption tax is? The first time it was proposed in 1984, few attorneys and CPA's even had any idea what it was. Although every couple of years it was reproposed, we ignored it as being politically unfeasible. That and the VAT tax—we scoffed at the notion. Now we have to learn how it works. How does it work? Well, let's see, there are really two components. First, the true consumption tax—a tax on everything one "consumes." But no tax on anything one saves. Aha! Lawyer jargon. I'll bet they're already writing articles on what it means to consume and what it means to save.

For example, the voice article on the news last night said "consume" means to actually use income or assets. They're going to tax us on the use of our own assets! How do you measure that? And how do you measure use of income? You have the opening FS-1 or FS-2 income figure; you show all income spent all year. Income spent, other than for "savings," is part of the tax base. Then you show the value of all assets you own on the FS-1 or FS-2 at January 1 and again the value of the assets on December 31. If the assets are worth more on December 31, you multiply the "applicable federal rate" for the category of asset times that higher value, and that's the value of the usage of your own asset during the year. If the asset is worth less, however, you average the higher and lower values and multiply that times the applicable federal rate. (Just like the government to do that, isn't it?) What if you can't find your asset described in the tables? You must choose the closest approximation. Will there be a penalty for purposely choosing the wrong asset category?

Next, you add the income consumption to the value of asset consumption and multiply the sum by the flat rate. Send it in! This is real tax simplification. But that's not all. Part Two of the FS-2 is a VAT—you know, a report on the national sales tax (rate of 18%). Remember all the talk about the Value Added Tax in the 70's? They kept saying, "It's not a sales tax." In fact, that's what it turns out to be 20 years later. A hidden sales tax on the increment of value each producer of products or offeror of services adds to something along the way between initial conception and ultimate consumption. A flat percent times the increment of value at each stage was the tax imposed. Who bears that tax in the long run if not the consumer? So how does it differ from a sales tax? Anyway, the voice article said you get a deduction against the consumption tax for 10% of the VAT tax paid, as figured by referring to Treasury tables like the old state sales tax tables back in the 70's and early 80's.

The most interesting part, though, is not what you consume, but what you save, which is not in the tax base. Does "save" mean money spent to educate yourself or a child? Or money spent on doctors, dentists, hospital bills, and health care? After all, what is health care exactly? Should tax laws define health care? Oh well, why not? They define everything from "person" to "marriage." Or what about charitable contributions that help society? Is that money spent or money saved? These questions may go unanswered for a long time.

Thinking about the upcoming hassles, harangues, regulations, rulings, court cases, and perhaps more legislation, and how it may affect your fundraising for the next decade or so, you start to think about years past. What happened? Was the income tax system so bad? You think about the loss in value of the charitable deduction within the income tax system. The deduction became less and less valuable because the rate plummeted from 91% in 1963 to 77% in 1965, then to 70%, which lasted until 1981, then 50% until 1986 and 28% in 1988. Should we have foreseen the loss of the deduction altogether and prepared for it? We all thought for sure that rates would rise again after the '88 election, making charitable giving more valuable. We also thought the 1986 tax rate drop meant paying less tax, but by 1987 and 1988, we discovered that wasn't true. And, in 1991, when the top rate dropped to 20% and we still paid more in tax, maybe we should have seen the handwriting on the wall.

We had some rude shocks in the charitable sector after the 1986 Act—the rate drops were to make donations scarce, but Black Monday made them scarcer. The AMT was in many cases insurmountable—not because it was so bad, but because so many advisors misunderstood it and how it applied to charitable gifts. They thought every dollar of appreciation would be taxed at 21%, instead of the often much smaller amount that was actually claimed on the regular tax, as limited by a person's percentage limitations. How many gifts were stymied because of that simple but disastrous misunderstanding?

Then the possibility that gift annuities might be taxed really stuck in our craw—after some 100 years of gift annuity issuance, how could they? And the dreaded GST tax—who ever understood it anyway?

But then we found, in 1988, that every cloud has a silver lining. Other areas of tax restrictions made our charitable deduction look very appealing—IRA's, pension plans, tax shelters, interest deductions, savings devices for families and education of children —and caused a frenzied search for tax-advantaged plans. Where did they turn? Planned giving had its Andy Warhol 15 minutes. Suddenly, the CPA's, financial planners, attorneys, stockbrokers, the whole professional field we'd struggled to reach for so many years discovered the last remaining tax shelter—charitable giving.

The end of income shifting was a near fatal blow to families' planning for college expenses until the planners discovered the charitable remainder education trust. And, despite the so-called maximum capital gains tax increase from 20% to 28%, people discovered the real increase was more like 200% for most American families. Charitable gifts became more appealing. People learned how to liquidate assets via charitable trusts, sell businesses via charitable trusts, create wholly tax-free wealth transfers through charitable wealth replacement trusts, and retire on charitable remainder trusts. And then, the early 90's, real estate inflation really heated up and we were in for another roll like the mid to late 70's, but worse. Bargain sales of real estate with installment payouts and charitable purchases of remainder interests on installments were really hot, as were remainder interests in exchange for gift annuities. Better yet, many organizations offered reverse annuity mortgages tied to an eventual gift. The creativity was overwhelming. And gift revenue went up, up, up.

But what happened? Everyone saw these opportunities. They became too popular in the eyes of the IRS. The insurance industry had few markets left, as did the financial planners. After the '86 Act, first they aggressively marketed the only other "tax shelter" left, the single premium life insurance policy—and BAM! it was gone in one or two years'. Then they turned their attention to the newly discovered "only tax shelter left"—charitable giving, and they were right in a sense; it was a way to provide for our struggle to survive while providing for our sense of social integrity. But the Administration slapped us on the wrist—brutally, several times, after the elections of '88. They said these were scams of the rich and schemes for transmitting wealth without taxation. To us, they were simply creative devices to keep charities alive.

But I guess it was the TV ads and the page-long Wall Street Journal ads that got the better of Congress. Remember how donor seminars became a dime a dozen? Especially Tuesday, Wednesday, Thursday, breakfast, lunch, late afternoon, dinner, and Saturday morning. We called it Estate and Financial Planning. Was it? Or was it really how to avoid taxes by using charity as a conduit? Did we peddle the charitable deduction? Did we add to the repeal of the income tax system?

"Mr. Morgan, everyone's waiting in the conference room." Goodness! It's three minutes to ten; your secretary seems to sense the gravity of the situation without a word from you. Where do we go from here? What you spend is taxable; what you save is not.

It's 9:59. You walk in to see strained faces, yellow pads and pencils. You pause, looking around carefully and deliberately at all 12 faces, knowing their anxiety, and say, "Every cloud has a silver lining and ours is more silver than most. For years we have been relying on a charitable deduction to motivate our donors, and it has been removed most painfully—like cutting off the dog's tail an inch at a time so it wouldn't hurt so much. We aggressively peddled charitable giving as a financial benefit—is that what it is? Giving by Americans happened before the deduction in 1913 and will happen after the deduction in 1998.

"I grant you that people will want something in return for sharing with us their beneficence. Does it have to be a deduction? Think a minute. With no income tax, there's no such thing as exempt status, or "qualified charitable deduction," or "qualified charitable remainder trust." No UBI. No appraisals.

"Does it mean we can't offer income to them? Or management of assets? Or psychological satisfaction? Named programs? How about avoidance of capital gains? Whoopee — no such thing as capital gains or AMT or GST!

"We can take in assets and offer income or annuities without worrying about qualification rules. Remember, we still earn income on those assets. Nobody killed the investment market.

"We can offer more: care for the elderly, helping with checkbooks, groceries, doctors' appointments in exchange for assets--PLANNED CARING--for those who love us.

"We have been set free--the bondage of the tax exemption/tax deduction has finally been removed. Remember how we used to endure tax-torture seminars? Today is freedom day! But freedom has its price. You have to learn marketing—real marketing—and understanding of our donors. You have to develop a real sensitivity to the needs of our donors and a real caring for what we can do for one another. A new era is starting—planned caring. Let's be pioneers in it.”


Dear Former CGPN Readers and New Readers of this article I wrote in 1988:

I originally dated the change in the law as September 11, 2018. Then I thought that was far too far into the future and revised the date to 2008.  Just as I wrote it for the Planners’ Forum column in 1988, I thought I’d make it 1998 to make it more believable. Now I think my first date was probably more accurate.  However, little did I know then that September 11 would become a date which will live in infamy.

Lynda L. Sands, 2014


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