The recent news about charitable contributions in the United States has been encouraging. The Giving Pledge, sponsored by Warren Buffett and Bill Gates, Jr., recently announced that another group of billionaires committed to leave a majority of their wealth to charity. Among these new Giving Pledgers are Judith Faulkner, founder of Epic Systems; Hamdi Ulukaya, founder of Chobani Yogurt; and Brad Keywell, a co-founder of Groupon. Moreover, Giving USA reported that charitable donations in 2014 reached an all-time high of $358 billion.
There is a connection between these two events. The Buffett-Gates Giving Pledge, augmented by a rising stock market, has undoubtedly stimulated charitable contributions, not just by Pledgers, but by individuals of more modest means. The Giving Pledge has reminded Americans of all income levels of the importance of a vibrant nonprofit sector, supported by robust charitable contributions.
However, the admirable benefits of the Giving Pledge should not obscure two important consequences resulting from increased charitable donations. First, the Giving Pledge erodes the federal tax base, particularly the federal estate tax base. Second, the Giving Pledge can be satisfied by gifts and bequests to family-controlled private foundations. While some private foundations are commendable institutions pursuing important charitable objectives, others are not.
Warren Buffett and Bill Gates, Sr. have been vigorous supporters of the federal estate tax. In this sense, there is considerable irony in the fact that Giving Pledgers avoid all federal estate taxes on the money they leave to charity. Indeed, much of the Giving Pledgers’ wealth consists of appreciated stock for which they have paid no federal income tax.
Mr. Buffett and Mr. Gates, Sr. have spoken eloquently of the need for wealthy individuals to repay the public for the government services that made their wealth possible. A Giving Pledger (or other charitable donor) who leaves appreciated stock tax-free to charity makes no such repayment.
Moreover, the Giving Pledge can be satisfied by a gift or bequest to a family-controlled private foundation. Many of these foundations, like the Bill & Melinda Gates Foundation and the Howard G. Buffett Foundation, are commendable institutions pursuing important causes. However, other family foundations are little more than dynastic devices for advancing questionable agendas. The controversy surrounding the Clinton Foundation has exposed to many the less attractive aspects of some family foundations.
In an article in the Florida Tax Review, I called for the limitation of charitable deductions for federal estate taxes. Such a limit would balance the need to encourage charitable giving with the countervailing policy that all persons should pay some tax. I called, at a minimum, for restrictions on the federal estate tax charitable deduction when wealth is bequeathed to a family foundation rather than to a public charity.
The Giving Pledgers need not wait for the federal tax law to be changed. Giving Pledgers can agree now that part of the wealth they transfer should go to the federal treasury to compensate—in whole or in part—for the estate taxes avoided by their charitable bequests. In addition, Giving Pledgers can make a commitment to leave part or all of their resources to public charities rather than private foundations.
In this way, the Giving Pledge’s beneficial impact on American society will be strengthened as the costs of the Pledge are reduced.
Image Credit: “Bill & Melinda Gates Foundation” by Lester Public Library. CC BY NC-SA 2.0 via Flickr.