In his new book Richistan, reporter Robert L. Frank of the Wall Street Journal offers much anecdotal evidence that the newly wealthy feel an intense desire to be involved in the philanthropic causes they support. Many of them feel repulsed at the notion of foundations existing “in perpetuity.” They also feel great angst at burying heirs under an avalanche of “unearned” wealth. The result, Frank conjectures, is a conscious increase in lifetime giving.
Numbers recently released by the Federal Reserve and analyzed by the Center on Wealth and Philanthropy back up these observations. Especially at the upper end, wealth-holders seem to have moved the allocation of their wealth away from heirs and towards philanthropy, particularly lifetime philanthropy.
Changing the Timing of Giving
It is important to recall how significant wealthy families’ giving is to philanthropy in general. Over the last few years populist complaints have re-emerged that the rich abuse philanthropy for their own gain. These complaints have a long pedigree, reaching back to the 19th century. As always, they tar the entire enterprise with a few exceptional cases. The broader story is that wealthy families in this country have always given the lion’s share to charity and have actually increased that share in the last decade.
For example, in 1991, households earning the equivalent of $200,000 (in 2005 dollars) gave just under 25 percent of all charitable gifts. Looking at the latest numbers, in 2003, similarly high-earning households gave over 40 percent of all charitable gifts, or around $80 billion.
A similar pattern emerges when we use net worth as our yardstick. In 1991, the wealthiest households ($1 million or greater net worth, in 2005 dollars), gave over 30 percent of all charitable dollars. In 2003, similarly wealthy households gave almost 47 percent, or $94 billion.
During this same period of time, charitable giving as a whole increased dramatically, leading us and others to herald the advent of a “golden age of philanthropy.” But just as dramatic is this increase in wealthy families’ share of overall giving, an increase of over 50 percent. This overall trend smoothes away market rallies and retreats over the past 13 years, revealing a decisive shift towards greater lifetime giving by wealthy households.
Changing the Allocation of Giving
The reasons for this shift are many and range from changes in the types of business wealth-holders are engaged in, political changes (as in the tax code), psychological changes of the sort that Frank points to, and social changes in attitudes towards philanthropy and family.
In previous articles in Philanthropy (“Philanthropy’s Indispensable Ally,” May/June 2005, and “Leaving a Legacy of Care,” January/February 2006), we began to explore the last of these changes: the migrating relative allocation between philanthropy and family in wealth-holders’ decisions about their wealth. We continue to find, as Frank and others have observed, that today’s wealth-holders are consciously limiting their allocation to heirs and are turning to philanthropy instead. This change militates against or at least softens the “dynastic” image that popular culture still perpetuates about wealthy families.
One way to document that change comes through examining estate tax data. Looking at the actual allocation wealth-holders plan into their estates is an indirect way to assess their lifetime giving.
Now, it is true that smaller bequests to heirs may indicate that parents passed more to their children during their lives. If that is the case, estate tax data could be misleading about lifetime allocations.
But the estate tax figures also clearly show that charitable bequests have continued to occupy the largest portion of the largest estates. When coupled with the information we just reviewed on the increasing size of lifetime giving by wealthy households, it is hard to imagine that the children are getting all the money during their parents’ lives and making charity wait until the end.
Numbers from the Net Estates
When looking at estate tax data, the figures we focus on concern “net estates,” which is the net worth of a decedent’s estate less any spousal deduction and estate fees. Most research on charitable bequests and the impact of estate taxes on charitable giving does not distinguish between first estates (estates of the first spouse to die) and final estates. As a result, since most first estates include relatively little charitable giving, and instead pass most of the assets to the surviving spouse, these analyses underreport wealthy families’ charitable bequests. The proper focus should look at the spouses together as a marital or parental pair, hence our interest in the “net estate.”
Recent data from the IRS allow us to analyze estate tax data up to 2004. From 1992 to 2004, the value of all net estates grew by about 43 percent, from around $84 to $121 billion (in 2004 dollars). But during that time, the allocation within these estates to charity grew even more, by 64 percent, from $9 to $15 billion. In other words, estates’ charitable allocation grew much more than their overall value, indicating an increasing disposition toward charitable giving by decedents.
At the same time, taxes’ share of net estates grew roughly in line with the estates’ own growth in value (48 percent versus 43 percent), while bequests to heirs grew only by 38 percent.
In other words, when all net estates are viewed together, the growth in bequests to heirs does not keep pace with the growth in the underlying value of the estates, while the growth in bequests to charity greatly outstrips that growth. This finding supports the growing sense that wealth-holders are consciously limiting their gifts and bequests to heirs.
The situation does become somewhat more complicated in the wealthiest estates, from which the greatest share of charitable bequests flows. For example, in net estates valued between $10 and $20 million, the percentage of the estate going to charity has held roughly steady from 1992 to 2005, between 15 percent and 19 percent. The percentage paid in taxes has trended downward slightly, from 46 percent to 40 percent, while the percentage bequeathed to heirs has trended upward, from 38 percent to 45 percent. In short, recent estate tax cuts may have shifted some wealth from taxes to heirs, but without necessarily lessening charitable bequests.
A similar dynamic emerges in the wealthiest estates, those valued at over $20 million, except in this case the charitable bequests are much, much larger. Because of their small numbers and large sizes, estates in this range may show much variability from one year to the next. But overall, from 1992 to 2005, their charitable allocation has remained in the percentage range of low 30s to mid 40s—a much larger charitable allocation than in smaller estates. Their allocation to taxes has trended slightly downward, in the low 30s, while allocations to heirs have trended slightly upward, in the high 20s. Again, heirs may slightly benefit from somewhat lesser transfers to Uncle Sam, but charity still receives the largest part of these wealthiest estates.
These observations conflict with some of the political rhetoric of the last decade, which has held that a decrease in estate taxes would lead to a precipitous decline in charitable bequests.
But even more significantly, in our view, is the support these data give to the claim that wealth-holders do not look to taxes as the sole or even primary factor in allocating their final or lifetime giving. The question is not just one of quantity: how much for me or for the government? It is more a question of quality: quality of life for me, my family, and my community.
Wealth-holders are increasingly looking to deploy their resources during their lives in order to share with others not just their dollars but also their values, insights, and experiences. At the same time, they are increasingly limiting their giving to heirs, perhaps out of concern that more money does not simply equal a better quality of life. We see these phenomena as connected. Both signal an increased sensitivity to the moral consequences of significant wealth, a development that bodes well for the commonwealth.
Paul G. Schervish is director, John J. Havens is senior associate director and senior research associate, and Albert Keith Whitaker is research fellow at Boston College’s Center on Wealth and Philanthropy. Dr. Schervish is also research fellow at the Indiana University Center on Philanthropy, and Dr. Whitaker is director of family dynamics at Calibre, a division of Wachovia Wealth Management.