Jewish World Review Nov. 13, 2003 / 18 Mar-Cheshvan 5764
Leaving a little something for the kids? Good luck
One of the big things weighing on parents' minds these days is what inheriting family wealth will do to
They fear that by passing along the family fortune they are condemning their sons and daughters to a
multidecade adolescence featuring risky behavior inappropriate to chronological age, visits to the
psycho-pharmacologist, and Patagonia parkas.
Anyone who has logged time among the confused offspring of America's prosperous cannot deny that
such fear is legitimate. At least for some families. In others, however, the younger generation puts on a
necktie from Brooks Brothers and generally rises to its responsibilities.
Less convincing therefore is the argument that tends to come next, which is that the nation needs an estate tax to keep
American children and grandchildren safe from the corrupting influence of cash.
Here is the appropriate rebuttal. You fear that your grandchild will be spoiled by your son's money, Grandpa Gates. That's fine;
keep that money away from that grandchild. But don't in your sanctimony deprive me of the opportunity to leave my child the
family business should I choose to do so.
Now Congress has set about creating an opportunity to call the bluff of the moralizing estate taxers. In a bipartisan effort,
lawmakers in the House and the Senate have backed legislation that would make it easier for parents to resolve their dark
conflicts in sweet charity. The Senate version, known as the CARE Act, is sponsored by Rick Santorum (R-Penn.) and Joseph
Lieberman (D-Conn.). For reasons too nasty to print in a family newspaper, Senate Minority Leader Tom Daschle (D-S.D.) is
holding up that legislation's processing in conference. Nonetheless, the ideas in the bills are so big as to be worth considering.
The first involves that standard American savings vehicle, the Individual Retirement Account. Under the CARE Act, IRA
owners would be allowed to roll over a share of their IRA cash into a charity without triggering any tax liability. That would
mean the charitable deduction would no longer be the only big tax break available for charitable giving--a relief, since that
deduction fades out for higher earners anyhow.
The "charity rollover" could alter a certain national ambivalence about IRAs, which are supposed to be the consolation of our
old age. But for those of us who have amassed some capital and continue to earn income into our sixties and seventies, they are
Indeed, as JP Morgan's Don R. Weigandt points out, "they are like a form of toxic waste. Any time you touch one, there are
going to be significant tax consequences." Income tax gets levied when you draw down cash from your IRA, an event that
becomes mandatory six months after your 70th birthday. Or, you may pay estate tax on it. And the kids also can pay tax when
they collect the money.
The charitable rollover would fix all that. It also represents a giant boon for the non-profit sector. Weigandt notes the amount of
cash resting in tax-favored accounts of the IRA class now stands in the trillions.
The non-profits are therefore lobbying like maniacs for the new legislation. These are in any case challenging times for them. In
a survey published recently, the Chronicle of Philanthropy reported that donations to bigger charities and non-profits in 2002
were down. Certain groups, such as the American Heart Association in Dallas and the Alzheimer's Disease Association in
Chicago, did very well. But, overall, the takings were 1.2 percent lower than the year earlier. The decline contrasts with an
average annual gain of 12 percent for the preceding five years.
But the charity legislation does not stop with IRA rollovers. For the first time, Congress would allow the 83-million-odd
households that take the standard deduction a chance to enjoy tax benefits from their charitable giving. For them, Congress
would create a special one-line charity deduction. This means lower-earning households may exploit the charity deduction
without losing the financial advantages of the standard deduction, often substantial for them.
A purist would revolt against the fussiness of all this compassionate conservatism. An overall cut in the income tax rate should
be the first choice. That would reduce the necessity for deductions and make withdrawals from IRAs less painful. There is also
the issue of moral hazard. Won't increasing the charity world's already troubling tax advantages "spoil" those non-profits,
turning them into big corrupt babies themselves?
Still, the big story for the moment is the IRA rollover, which might at least make the brooding parents among us a bit more
honest. Those who want to offer their children the bracing experience of financial independence now have another method for
doing so, so that they themselves may climb clean and broke into their virtuous graves.
The rest of us then can make the repeal of the estate tax permanent and work toward a system under which we all can dispose
of our cash as we see fit, instead of disposing of it for tax reasons. Now wouldn't that be a fine legacy?
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JWR contributor Amity Shlaes is a columnist for Financial Times
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