Updating Our Look

This month we introduce the first update to the appearance of Trusts & Estates magazine in many years. Our goal: to make the packaging as sophisticated and dignified as the content has always been.

But this is more than a face lift. We are hoping to make T&E more “user-friendly” and information-rich. This issue, we also add two new sections: “Editor’s Briefing” and “Contents and Summaries.”

The “Editor’s Briefing” is my newsletter to you. Like any editor’s note, it will share information about the magazine. More importantly, this is also where I will be able to provide you with updates—news items—on interesting developments in the field of wealth management. Readers are encouraged to send tips: rsherman@primediabusiness.com. All credit will be given to sources (anonymity provided upon request).

“Contents and Summaries,” starting this month on page 6, is a table of contents that also delivers executive summaries for the magazine’s features. The section will be posted on our Web site, trustsandestates.com. That way, readers will have ready access to a description of what’s inside every issue.

We hope you find the additional sections of the magazine helpful. We hope you like the magazine’s updated design. We welcome suggestions for further improvements. I look forward to hearing from you with ideas for news items.

And now, for the news.…

For Love of Fairness
Rich people dedicated to decreasing the enormous inequities in wealth in the U.S. held a pep rally in Seattle last month to protest the repeal of estate and dividend taxes as well as other government and corporate policies that protect the wealthy.

About 120 members and prospective members of the nonprofit group Responsible Wealth (RE) attended a conference headlined by William H. Gates Sr., held March 7 to 8 at the Westin Hotel.

Members of Responsible Wealth, of which Gates is a prominent example, have at least $164,000 in annual income or $650,000 in assets. In the past two and a half years, membership has doubled to more than 700. Other “name” members include George Pillsbury and various Rockefeller and Procter & Gamble heirs.

Conferees were treated to two major addresses. Gates Sr.—father of the richest man in the world and author of the recently published Wealth and Our Commonwealth—declared it “stunning” that, “in the face of national budget deficits growing from a start of some $300 billion this next year, we are seriously discussing repealing the estate tax—repealing it just as it is about to become a huge contributor to the federal budget.”

Attendees also heard David C. Korten, author of When Corporations Rule the World, issue a call “to replace a global suicide economy that is destroying life to make money for rich people with a new American economy devoted to the service of life.”

During the conference, RE launched “a tax-fairness pledge,” asking volunteers to donate to charity their 2002 capital-gains tax-cut proceeds. Similar requests from 1998 through 2001 raised more than $4 million.

Since 2001, RE has been collecting signatures for its “Call to Preserve the Estate Tax,” amassing more than 1,400, including those of financier George Soros and former media mogul Ted Turner.

Pray For The Rich
Osama bin Laden may decry Americans as faithless infidels, but our nation’s charitable giving suggests otherwise: Americans donate more to religion than to any other single cause—in bad times even more than good.

Philanthropy experts say giving to religion is ingrained in Americans at an early age. Many “people grow up with a parent who has always written a check to the church,” notes Ann Cohen, chief executive officer of Washington, D.C.’s Philanthropic Solutions, a consultant to nonprofits. At last count, 57 percent of all American philanthropy went to religious causes—and that’s not including gifts to universities and hospitals run by religious groups.

There is, however, one major, unexplained difference between the classes when it comes to religious giving. Although a majority of higher-income households ($250,000 and up) give more dollars to religion, they apportion a smaller percentage of their overall charitable spending to such causes than the less well-to-do. And it may be that the super-wealthy give even less than the merely affluent. Looking at the 60 most-generous donations by individuals, The Chronicle of Philanthropy’s recently released 2002 survey found more given to educational and medical institutions and to arts groups than to religious organizations. This has been consistent over the years, according to the Chronicle.

In fact, the biggest gift in 2002 came from Walter H. Annenberg, who left his art collection, worth at least $1 billion, to the Metropolitan Museum of Art. Meanwhile, the largest gift to religion last year came from a man who’d just joined the ranks of centi-millionaires. At the end of 2002, Andrew J. Whittaker Jr. of Scott Depot, W.Va., won the $314.9 million Powerball lottery, received $311 million in cash and vowed to immediately tithe 10 percent to a newly formed foundation, which will be overseen by three pastors of the Church of God.

To get a handle on more general gifting patterns, John Havens, co-director of the Social Welfare Research Institute at Boston College, crunched some numbers for Trusts & Estates. He used the latest data (2001) from the University of Michigan’s Panel Study of Income Dynamics and Indiana University’s Center on Philanthropy Panel Study. Both studies rely on the same national sample of 7,406 families.

Havens found that 62 percent of households with an annual income of $250,000 or more gave $6.8 billion to religious causes in 2001. This was 42 percent of their total donations for the year, the greatest concentration. The rest, $9.5 billion, went to a variety of other causes. In contrast, 55 percent of households making between $50,000 and $100,000 gave to religious causes. Their $29.8 billion outlay was 67 percent of their total giving for the year.

“When it comes to religion, the wealthy don’t scale up,” says Robert F. Sharpe, Jr., president of The Sharpe Group, an endowment-development consultant based in Memphis. Instead, “they give to more things.” At the same time, he says, people who don’t have as much money feel there’s “a certain threshold level of obligation” when giving to religion.

Still, religion does pretty well in our nation—reaping $84.9 billion out of a total $149.4 billion in charitable donations in 2001 (the last year for which national stats are available). “Giving to religious causes has gone up since 9-11,” says Sharpe, whose clients come from the ranks of our nation’s super-rich. And those numbers are likely to rise still more with the war in Iraq and ongoing terrorism threats and economic malaise. The recently released Philanthropic Giving Index from the Center on Philanthropy reports that expectations for the first half of 2003 among religion fundraisers were higher than for any other group of fundraisers.

Says Sharpe: “It’s the arts that are tanking right now. People don’t go to glitter balls at times like this.”

Alternative Investments
The rich have a high tolerance for alternative investments. At least that’s one conclusion to be drawn from a recent survey of 105 ultra-high-net-worth families conducted by the Oak Park, Ill.-based Family Office Exchange, a membership group dedicated to the management of family offices.

A full 39 percent of respondents’ liquid portfolios were dedicated to such alternative investments as private equity, hedge funds and real estate. That translates into a lot of money: The total size of liquid portfolios of family offices providing data was about $18 billion, with an average of $230 million and a median of $120 million in total liquid assets.

While 14 percent of respondents’ overall assets were allocated to private equity, according to the study, most of that was in venture capital. Most of the hedge funds picked were multi-strategy. And the most common real estate investment was commercial space.

Tax Law
From David Handler of Chicago’s Kirkland & Ellis, we have these updates:

Transfer a Gift Despite Lack of Donative Intent: The U.S. Court of Appeals for the Tenth Circuit on Feb. 11 held that a transfer to a trust was a completed gift subject to federal gift tax, notwithstanding the absence of donative intent, which was a required element for a completed gift under applicable state law. In so ruling, the court stated that the existence of a gift for federal tax purposes does not depend on the existence of a gift under state law. Wells Fargo Bank New Mexico v. United States, 2003 TNT 30-9 (10th Cir., 2003).

Two-Life Annuity a Qualified Interest: The U.S. Court of Appeals for the Ninth Circuit on Feb. 18 reversed the U.S. Tax Court, holding that an annuity payable for 15 years to the grantor or, if the grantor died during the 15-year term, to the grantor’s spouse, is a “qualified annuity” under Regulation Section 25.2702-2(a)(6). By giving both spouses an interest in the annuity, the gift to the remaindermen was significantly reduced. (By making the spouse’s interest revocable by the grantor, a taxable gift to the spouse was avoided.) Schott v. Commissioner, No. 02-70007 (9th Cir., 2003).

Section 645 Regulations Finalized: Effective as of Dec. 24, 2002, the just-released final regulations under Section 645 (T.D. 9032) permit the executor of an estate and the trustee of a qualified revocable trust (QRT) to elect to treat the trust as part of the estate, rather than a separate trust. The final regulations generally adopt the proposed regulations, with a few modifications.

Payment of Estate and Administrative Expenses Does Not Disqualify CRUT: Private Letter Ruling 200305023 issued Oct. 28 found that payment of a decedent’s administration expenses and estate taxes out of funds allocable to a testamentary charitable remainder trust (CRT) will not cause the CRT to fail to qualify as a charitable remainder trust under Internal Revenue Code Section 664 when such funds are the only ones available for such purpose, notwithstanding the prohibition against payments not described in Section 664(d)(2)(B).

—Karen Angel, senior editor, helped prepare this briefing.