17 September 2021 - Article
The Council on Foundations in the US has warned that the new US tax legislation changes will result in a decrease of $16 – $24 billion in charitable giving every year. This dismal forecast is likely based on a couple of individual changes in the tax legislation:
(i) the increase in the standard deduction, which will lead fewer people to claim the income tax charitable deduction for annual giving
(ii) the increase in the US federal estate tax exemption from $5 million to $10 million (indexed to just over $11 million), which will lead to less charitable legacy giving.
While we know that donors are not singularly motivated by tax advantage, we do know that donors tend to give more when there is tax relief to be had. So where is the silver lining in all of this for charities seeking legacy giving, particularly non-US charities?
One positive is that legacies to non-US charities may be even simpler for estate administrators to distribute. The US rules allow the estates of US persons to take a federal estate tax deduction for charitable bequests (assuming other conditions are met), regardless of whether the recipient charity is located in the US. In practice, however, this typically means that executors of those estates must satisfy themselves that a non-US charity is otherwise equivalent to a US charity in order to claim the deduction, typically supported by a legal opinion, which is a cost borne by the estate and, ultimately, the beneficiaries of the estate. The increased US federal exemption means that a greater portion of a US person's estate will be free of US federal estate tax and thus obviate the need for the usual enquiry into a non-US charity's status.
The other thing to bear in mind is that many US states are not aligned with the federal rules, meaning that the US federal estate tax exemption may have increased to $10 million but domiciliaries of certain states will be subject to a state-level exemption of only $5 million (or possibly less). That differential between the US federal and state estate tax exemptions should be a target for any charity, and well-advised donors should be aware of the discrepancy. Most states follow the US federal rule in terms of eligible recipient charities for state-level estate tax charitable deductions so non-US charities can potentially benefit from the mismatch.
Finally, it is important to remember that the rules are different for non-US people with US situs assets, including US vacation homes. The US federal estate tax exemption in such cases is a measly $60,000 and the US federal estate tax charitable deduction is only available if the US property is left to a charity located in the US. This is where a US 'Friends of' or donor-advised fund comes in handy and can help facilitate support to a non-US charity. In addition, there is the ability under certain tax treaties, including the US-UK Estate and Gift Tax Treaty, for non-US people to elect to be treated as US people, which is a great option for anyone whose total worldwide estate is below the US federal estate tax threshold.