July 11, 2008
The Charitable Deduction: Who Really Benefits and Who Really Pays?
In Wednesday's New York Times Op-Ed Section, Boston College Law School Professor Ray D. Madoff criticizes the charitable deduction's role as a mechanism allowing people to donate as much of their assets as they like for charitable purposes without paying tax.
Using Leona Helmsley's recent charitable bequest that $8 billion be used for the care and welfare of dogs as an example, Madoff argues that because a charitable deduction constitutes a subsidy from the federal government, the government becomes a partner in every charitable bequest and taxpayers are the ones who end up paying. In Mrs. Helmsley’s case, since her fortune warranted an estate tax rate of 45%, her $8 billion donation for dogs is really a gift of $4.4 billion from her and $3.6 billion from taxpayers.
Because the law has very loose standards for what constitutes "charitable status," donors only need to direct their assets be used for some type of charitable purpose and they are relieved from paying tax on their donations. Professor Madoff comments that had Mrs. Helmsley limited her beneficence even more narrowly, for, example, to the Maltese breed of dogs she favored, the bequest would still have qualified as being a “charitable” purpose.
Mrs. Helmsley chose to disburse her bequests through the Leona M. and Harry B. Helmsley Charitable Trust, a type of foundation that typically performs no charitable work but only gives money to organizations that do. The law requires foundations to spend a minimum of just 5% of their assets a year, thus helping ensure their perpetual existence, and as Madoff labels: "their donors’ immortality." In meeting this requirement, foundations are allowed to count fees paid to their trustees and other administrative expenses. According to Madoff, "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."
After noting that Congress' 2003 bill requiring private foundations to devote the full 5% to charitable expenditures failed to pass after foundations complained it would threaten their perpetual existence, Madoff criticizes the perpetual charitable trust as an effective mechanism "because a dollar spent today is worth more than a dollar spent several years from now, in many cases, the sum of payments made over time — even in perpetuity — never equals the value of the original principal." Since perpetual trust funds tie money up and are based on the flawed assumption that we know the best way to use resources far into the future, "we deprive ourselves of resources for addressing the obvious and compelling needs of today."
Madoff appeals to Congress to change the tax code and also offers a way to compromise: "There should be a limit — a dollar amount or a percentage of the estate — on the estate tax charitable deduction. People could still give to charity as they like, but after a point they would be giving after-tax dollars. The deduction should be lower for bequests to private foundations than for money given directly to good causes."
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