Estate Taxation and Charitable Bequests

Abstract

This paper examines the relationship between the estate tax and charitable bequests, to predict the impacts of the Tax Cuts and Jobs Act of 2017 (TCJA) on charitable bequests. Decedents (people who have died) can claim an unlimited deduction for charitable bequests on their estate tax returns, suggesting that the estate tax, and changes thereto, can impact charitable bequests. TCJA temporarily increased the federal estate tax exemption (from $5.49 million in 2017 to $11.18 million in 2018, indexed for inflation) for tax years 2018 through 2025. Consequently, “the number of taxpayers affected by the [federal estate tax was projected to decrease] by over twothirds…over the next decade,” according to a 2019 study by Robert McClelland of the Urban Brookings Tax Policy Center, which found that “the number of taxable estates [declined] from about 5,500 in 2017 to less than 2,000 in 2018, representing about 0.2 percent of the estimated 2.7 million people who died in 2018.” At the time of writing, tax reform is a realistic possibility. Democrats control both chambers of Congress, and Democratic President Joe Biden has voiced support for overhauling the tax system. In 2020, then-candidate Biden proposed lowering the estate tax exemption to $3.5 million (from the current $11.58 million) and raising the estate tax rate to 45 percent (from the current 40 percent). More recently, Senate Budget Committee Chairman Bernie Sanders introduced legislation that would impose a 45 percent tax on estates valued between $3.5 million and $10 million, and a 65 percent tax on estates valued above $1 billion.5 Sanders’ bill has co-sponsors in both the Senate and House of Representatives. If Democrats use the budget reconciliation process, tax legislation can be passed in the Senate with a simple majority. If the estate tax affects charitable bequests, as hypothesized, then the sweeping changes proposed by the likes of Biden and Sanders could have profound effects on charitable bequests, for good or ill.