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Estate Tax Law Uncertainty Affecting Donations to Museums

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"If people begin to get used to the idea of no or low inheritance taxes, it does take a tool out of my toolbox," said Houston Museum of Fine Arts director Peter Marzio. That tool is the lure of reducing an heir's tax liability with the deduction that a gift of money or artworks to the museum could provide.

The current year is an anxious one for museums and all other nonprofit organizations and institutions around the country, since there is no inheritance tax for 2010 because Congress failed to pass legislation to reform the transfer tax system last year. That left in place a dead spot between a sunsetting provision in the Economic Growth and Tax Relief Reconciliation Act of 2001, which gradually raised the estate tax exemption from $675,000 to $3.5 million, and a return of the estate tax levels of 2002 ($1 million exemption and a 55 percent tax rate beyond that) unless new legislation is passed. Last December, the House of Representatives narrowly passed a bill to make permanent the estate tax levels of 2009 ($3.5 million excluded and a 45 percent tax rate), but the Senate failed to act. Republican South Carolina Senator Jim DeMint put forward a bill to repeal the estate tax, as well as the individual income tax, corporate income tax and gift tax, replacing them with an 8.4 percent national sales tax, and Republican Arizona Senator Jon Kyl has introduced legislation to increase the exemption to $5 million with an estate tax rate of either 20 or 30 percent.

Marzio stated that donors don't give to the museum "based on the tax rate. They make contributions because feeling an attachment to this place." Too, museums are not attempting to become tax advisors to their donors and, instead, stress the legacy that an individual may leave through a gift. However, he acknowledged that tax considerations play a part in when and how much they give, noting that development staff regularly discusses planned giving techniques, such as bequests, fractional gifts and remainder trusts, with prospective donors in order to "trigger an awareness of what might be in their best interest and in ours."

With no current inheritance tax and the possibility that the exemption may drop to $1 million or rise to $5 million or be done away with completely, it makes the type of planning that wealthy art collectors do much more complicated. "People need to feel comfortable in a culture of giving," said Louis Grachos, director of the Albright Knox Art Gallery in Buffalo, New York, "and they don't feel comfortable right now. I have heard from prospective donors who've said, 'I don't know what I should do.' It's one more hurdle for museum directors."

He noted that the lack of clarity about the inheritance tax "takes away a positive incentive for giving," and that his pitch to donors at present is that they should include the museum in their bequests "even if there is no financial benefit." One of those donors, 75 year-old retired former Albright Knox board chairman Charles Balbach ("I'm in good health, thank God"), acknowledged that "there is no advantage to giving anything this year, because it costs you 100 cents on the dollar." However, he made out his will five years ago, providing a bequest to the museum and has no plans to change those provisions regardless of what Congress does or does not do. "I can't speak for other people, though."

The uncertainty about the inheritance tax has created anxiety among wealthy people planning their estates and within the nonprofit realm as a whole. The Washington, D.C.-based advocacy and research organization for the nonprofit world Independent Sector has been contacting legislators about the need to enact some law so that prospective donors can plan ahead, although neither the American Association of Museums nor the Association of Art Museum Directors has made the inheritance tax a priority. "There are just so many other issues that we're dealing with right now," said AAM President Ford Bell, adding that he favors the legislation that the House of Representatives passed last year.

"We expect Congress to do something," said Ralph Lerner, a Manhattan estate attorney and co-author of Art Law (Practicing Law Institute). "Until then, I'm just adopting a wait-and-see attitude." Another lawyer who works both with estates and in the nonprofit arts, Philip T. Temple in White Plains, New York, stated that he has recommended to clients that they "bifurcate their wills. 'If I die in 2010, here's what should be done; if I die after 2010, here's what we should now do.'"