Perhaps one of the most powerful financial incentives for donors to create charitable remainder trusts is the wonderful ability of these trusts to enable the sale of an appreciated asset without capital gains tax.

The U.S. federal maximum capital gain rate is 28 percent. Many states also levy a capital gains tax. In California, for instance, the blended state and federal capital gains rate is often about 35 percent.

As we know, Republicans and Democrats are debating the merits of a capital gains tax cut being pushed by Republicans. Not unexpectedly, many Democrats are opposed to the cut. It favors the wealthy, they believe.

The Congressional Budget Office ("CBO") has just released a study which suggests that a far larger portion of the U.S. population would directly benefit from a cut in the capital gains tax than asserted by many who oppose the cut. The report is likely to fuel the momentum for a tax cut.

According to the report, "(i)t is not true . . . that most people who have taxable capital gains have high incomes. Nearly two-thirds of tax returns reporting capital gains are filed by people whose incomes are under $50,000 a year."

A review of the report suggests a far larger proportion of Americans own assets that could produce a gain than is generally believed. According to the CBO, 76.6 percent of U.S. families owned assets such as stocks and bonds, real estate, homes, businesses, etc.

The study found that investments that generated capital gains accounted for about 38 percent of the total wealth of families. Homes accounted for 28 percent. Pensions accounted for 19 percent.

Not unexpectedly, families with higher incomes were more likely to hold capital assets than those with lower incomes. But the just-released CBO report found that 35 percent of families with incomes under $20,000 owned capital gains assets - without including their homes.

One reason charitable trusts find their greatest use among older Americans is that the Eisenhower generation -- the generation of Americans approximately age 55 and over -- tends to have the greatest accumulation of appreciated assets. It is not surprising, then, that the report found that individuals 65 and older accounted for 12 percent of all taxpayers in 1993, but paid 30 percent of capital gains taxes.

That CBO study takes on added significance when considered in light of a 1993 Cornell study conducted by Robert B. Avery and Michael S. Rendall. These researchers predicted that, as the Eisenhower generation passes from the scene, it will release an estimated $10.4 trillion in wealth. Those setting strategic direction for their planned giving programs have reason to pay attention to the debate over the reduction of the capital gains tax. Will a capital gains tax cut reduce the ability of U.S. nonprofit organizations to compete with the federal government and baby boomers for the wealth release? If so, to what extent?

There has been something of a split of opinion in the U.S. gift planning community. Some believe donors who create charitable trusts do so primarily because of a preexisting philanthropic motivation. Such gift planners tend to be those working in environments rich in prospective donors, such as major universities. Logically, those who believe that tax and other incentives play a minor role in the establishment of charitable trusts should not be concerned about the reduction or elimination of the U.S. capital gains tax.

Others believe such trusts are established primarily for the financial and estate planning benefits of such transactions, and only secondarily for the philanthropic good that such transactions can do for charity. Such planners tend to be in private practice -- such as lawyers, accountants, life underwriters, bankers, asset managers, securities brokers, and so forth -- but can also be found in the smaller, less donor-rich nonprofits in the U.S.

 A recent dialog on PG-AmPhilRev, a public-service Internet discussion list sponsored by American Philanthropy Review, suggests that the majority of gift planners seem to believe it is a synergistic combination of economic and philanthropic motivations that leads to the establishment of charitable trusts. Most gift planners agree that a reduction in the capital gains tax will weaken to some extent the appeal of such trusts. It remains to be seen to what extent such a reduction will result in declining numbers of charitable trusts.

 Posted to PG-AmPhilRev. Copyright © 1997 American Philanthropy Review. Permission is granted to re-post this to other discussion lists or web site archival systems, provided full attribution is provided.

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