Charitable Bequests

Do we need to put charitable bequests on a shorter leash?:

Dog Eat Your Taxes?, by Ray D. Madoff, Commentary, NY Times: The latest news ... that Leona Helmsley left instructions that her charitable bequest of as much as $8 billion be used for the care and welfare of dogs, rubs our noses in the tax deduction for charitable gifts and its common vehicle, the perpetual private foundation. Together these provide a mechanism by which American taxpayers subsidize the whims of the rich...

The charitable deduction enables people to donate as much of their assets as they like for charitable purposes without paying a tax. While some choose to contribute to broad public goals, the law does not require it. In recent years, charitable status has been recognized for organizations with purposes as idiosyncratic as promoting excellence in quilting and educating the public about Huey military aircraft. ...

If this were only a matter of Leona Helmsley wasting her own money, no one would need to care. But she is wasting ours too.

The charitable deduction constitutes a subsidy from the federal government. ... In Mrs. Helmsley’s case, given that her fortune warranted an estate tax rate of 45 percent, her $8 billion donation for dogs is really a gift of $4.4 billion from her and $3.6 billion from you and me.

To put it in perspective, our contribution to Mrs. Helmsley’s cause equals approximately half of what we spend on Head Start... What will we get for our $3.6 billion? An eternal monument to Leona Helmsley’s generosity toward dogs. ...

Mrs. Helmsley elected to disburse her bequests through the Leona M. and Harry B. Helmsley Charitable Trust. Most such foundations perform no charitable work but only give money to organizations that do. The law requires foundations to spend a minimum of just 5 percent of their assets a year, thus helping ensure their perpetual existence, and their donors’ immortality. In meeting this requirement, foundations are allowed to count fees paid to their trustees and other administrative expenses.

In 2003, legislation was introduced in Congress that would have required private foundations to devote the full 5 percent to charitable expenditures. But the foundations complained that this would threaten their perpetual existence, and the bill did not pass. ...

We should not give a blank check to support the whims of the wealthy. There should be a limit ... on the estate tax charitable deduction. ...

We should also stop subsidizing immortality. Private foundations should be required to spend more of their assets on charitable work, even if it threatens their perpetual existence.

Until Congress makes these changes to the tax code, it is not just Leona Helmsley’s fortune that is going to the dogs; it is our tax dollars as well.

One quibble (it's the Lucas critique). If the law had been changed, then there wouldn't necessarily be $8 billion available to be taxed at a 45% rate. If the rules on charitable bequests had been different, or if they had been eliminated, she may have taken actions while she was still alive, e.g. donations to help dogs or some other use of the accumulated wealth, that lowered the estate value to much less than $8 billion. That doesn't alter the main point of the article, just the calculation of the tax revenue under the alternative scenario.

On the bigger issue, I don't mind an incentive to divert money to charity (one justification comes from a market failure argument), but there needs to be a more restrictive definition of what constitutes a charitable donation. However, though some charitable bequests clearly fall outside what I would be willing to acknowledge as charitable spending, I'm not sure how to draw the line in general (though it does seem possible to find things that almost everyone would agree qualify as charitable). In this case, I don't think anyone would have batted an eye if she had left, say, $25,000 to animal welfare groups, so it's really the amount, not the purpose, that seems to be the issue. I think $8 billion for dogs probably crosses some line, but again, I'm not sure exactly where that line is. Is $500,000 too much? $400 million? So unless we are willing and able to be a bit more restrictive on what types of spending ought to apply, and perhaps impose a cap, somehow defined, to prohibit excessive charitable bequests maybe we should scrap this particular means of encouraging people to donate to charity and use other means that are likely to induce similar donations from the same individuals, but produce better social outcomes.

Comments

[robertdfeinman]

I've argued against large scale philanthropy before:
Abolish Philanthropy

I claim that Bill Gates's micromanaging TB and Malaria efforts is just as socially unacceptable as this more obviously ludicrous example. NGO's will tell you about the destructive effects of helicopter philanthropy on their long-range plans and priorities.

The easiest way (theoretically, not politically) to stop this type of anti-democratic abuse it to prevent the accumulation of such large fortunes to begin with. Some combination of higher marginal tax rates, uniform rates for earned and unearned income, wealth taxes and estate taxes could make for a more equitable society.

The British managed to do this when they broke up the landed gentry. It took about two generations of death duties to do it, but the country came out better afterwards. The reversal that started under Thatcher has allowed for much of the re-emergence of the kind or wealth excess that had become a thing of the past.

If excessive wealth is eliminated that the money goes to the government where how it is used is subject to the usual democratic pressures. If people feel that they don't have enough say on how government spends money than that shows that the current democracy is imperfect.

The cure for imperfect democracy is more democracy, not less.

[Brooks Gracie III]

As a tax attorney, I had a client who "donated" his guest house to his own private foundation, then "donated" several millions of dollars of artwork to the foundation, to be displayed in the guest house. Then he did all his entertaining in the guest house, and it became a social hotspot of the California artsy/wealthy set.

Of course he got a tax deduction for the full market value of the guest house and artwork. Promoting the arts may (but not in my opinion) be a defensible charitable purpose, but from the above example it is usually done for some private benefit (though not as piggishly as this client).

An even bigger problem is that there are so many tax-exempt entities out there, who file informational returns (Forms 990) with the IRS, that the auditing of these entities is almost non-existent.

For an even funnier example, there was a father and son who attempted to form a non-profit sperm bank, where the father and son donated 97% of the sperm, and made all of the decisions as to which sperm to use to impregnate its clients! Tax deductions for masturbation--how much more ludicrous can this get?

[Bill Jefferys]

It's amusing that several responses to this article make the bogus claim that the estate tax taxes twice. In fact, it is darned difficult to become one of the super-wealthy if you pay taxes. A key to becoming super-wealthy is AVOIDING paying taxes, as Leona Helmsley herself boasted doing.

It wasn't for nothing that Warren Buffet pointed out that his effective tax rate is much lower than his secretary's. He was right to criticize this state of affairs.

[save_the_rustbelt]

The year Leona was indicted (and convicted) for tax fraud she and Harry paid something in the neighborhood of $50M in taxes, but should have paid about $60.

Brooks - I hope you didn't sign the tax return (???????)

[Lord]

If they will cover the cost of a dog, I would be happy to give another a home.

[Id]

Leona is spending our money?

Shoulda been spent in Iraq.