The Australian Centre for Philanthropy and Nonprofit Studies, qut

International context

Tax and charitable bequests

In broad terms, many Western countries structure their tax regime so as to stimulate charitable giving by those with the greatest financial capacity (Roodman and Standley 2006) by providing them with incentives to give. For charitable bequests this most often takes the form of exemption of gifts from estate or inheritance taxes.

While ‘estate tax’ and ‘inheritance tax’ are terms that tend to be used interchangeably, they tend to have distinct and separate meanings depending on the countries in which they operate. In the US both forms are applied. Estate tax is a tax levied on the full value of the assets of a deceased estate prior to them being distributed to beneficiaries. It is paid by the estate. Inheritance tax on the other hand is a tax levied on the value of assets inherited. Inheritance tax is applied to the value of the distribution received and is paid by the inheritor. In the US, inheritance tax is levied by the states.

Australia is one of the few countries in the Organisation for Economic Co-operation and Development (OECD) without estate/inheritance taxes. A 2006 Australian Treasury report on Australian tax practices in an international context (Warbuton and Hendy 2006) found that Australia is one of two out of 10 comparative OECD countries that do not impose any estate or inheritance taxes. In Canada, the other comparator country without estate or inheritance taxes, the absence of a financial incentive to distribute estate wealth beyond the family has a dampening effect on estate planning for charitable bequests (Ball and Dietrich 2011).

The taxation regime in the UK is one where specific incentives are included to encourage charitable giving, both during life and from one’s estate.

In the UK estates with combined gross assets exceeding the inheritance tax threshold (currently £325,000) are required to pay inheritance tax on any amount above the threshold. Where the applicable threshold for a surviving spouse is up to double,

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  the rate payable is 40%
  
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  inheritance tax does not apply to anything left to a husband, wife or civil partner, and
  
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  the rate may be reduced to 36% if at least 10% of the net value of an estate is left to ‘qualifying’ charities, museums, universities or community amateur sports clubs.
  

‘You can write a clause into your will to make sure that you’ll leave 10% of your estate to charity … The beneficiaries of an estate can change the will to make or increase a donation to a charity so the estate meets the 10% test.’

Taxation considerations also need to be recognised as just one element of the ‘“total” social phenomena’ that influence giving behaviours. History, culture and tradition all play a role. Differences by nation in the characteristic approach to bequests has been recently highlighted in the finding of significant intercountry differences in bequest plans in China, India, Japan and the US. Analysis of survey responses indicate that the bequest plans of Americans and Indians appear to be much more consistent with altruistic preferences than those of the Japanese and Chinese (Horioka 2014). The importance of understanding diversity in approaches to charitable giving is also being foregrounded in emergent literature of diaspora philanthropy (Baker, Battiston and Mascitelli 2013 [2007]; Brinkerhoff 2012; Clerkin et al. 2013; Menkhoff and Chang-Yau 2010), highlighting the need for both fundraising and policy initiatives promoting charitable bequest giving to be alert to cultural differences and similarities. The proposal by the Henry Tax Review (Henry 2010) in Australia for a community debate around a potential bequests tax gained no traction, in part because of public indifference to considerations of distributions of ‘family money’ outside the family (Gilding and Glezos 2014).

Eye on the prize

The baby boomer generation is generally considered to be people born from 1946 to 1964. In Australia, where the average life expectancy is in the early 80s, that means that this large and wealthy demographic will begin the intergenerational transfer of wealth beginning in earnest towards the end of the 2020s and this will continue for about two decades. Even a small increase in the proportion of individuals who leave something to charitable purposes from their estates would result in a significant increase in the value of charitable funds.

The potential is highlighted by what is currently a considerable gap between high rates of regular charitable giving and very low rates of participation in charitable bequest giving. The Giving Australia 2005 report (ACOSS 2005) estimated that 87% of adult Australians made a monetary gift to charity over the course of year, and that of the 58% of adults who had a Will, 7% indicated they had included a charitable bequest. A more recent analysis of a national sample of probate files in Australia found that 6.5% of probated estates had included a charitable bequest (Baker 2014).

Direct comparisons of giving between peoples of different countries are difficult because the definition of what is charitable varies by country, as does the way in which participation is measured. Nevertheless, the large discrepancy between day-to-day participation rates (gifts made inter vivos) are consistently much larger in comparable countries, than the rates of participation in charitable bequest (post mortem) giving. In Canada, for example, the participation rates in charitable giving appear to be very similar to those of Australia, with 82% of Canadians giving money to a charity or nonprofit organisation (NPO) (Turcotte 2015b, 2015a) and 7% leaving a planned gift to charitable purposes in their Will. In the UK, 58% of adults donated to charitable causes in a typical month in 2010–11 (NVCO 2013) and Remember a Charity (2015) estimates that in 2013 the percentage of people in the UK leaving a charitable bequest was 7.3%. In the US an analysis of the Health and Retirement Study (HRS) data of people aged 55 and over found that found that 5.7% included a charity in their estate plans (James III 2009).

Despite the low levels of population participation in charitable bequest giving the funds that do flow from bequests are substantial and of considerable importance to charitable organisations. Giving USA 2015 reports that charitable bequests constituted 8% of total giving (US$358 billion) in 2014. In a recent survey of nonprofit organisationsNPOs in the US that pursue charitable bequests, less than 1% of the bequests granted to the institutions sampled over the past five years came from individuals aged under 40 (Primary Research Group 2015). In the UK the voluntary sector is estimated to have received £2.0 billion in bequest (legacy) income in 2011–12; contributing some 5% of total sector income (Kane et al. 2014). The role played by bequest income for larger charities is even more substantial, with the top 500 fundraising charities in the UK having been found to receive 23% of all fundraising income from legacy giving (Pharaoh 2010).

The potential for the gap in day-to-day and bequest giving has been well demonstrated in the US (James III 2013). Many of the basic demographic trends are in the same direction in Australia:

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  Australia has an ageing population—research indicates a positive association between age and charitable giving (Bekkers and Wiepking 2011a), and a positive association between age and charitable bequests (Baker 2014)
  
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  Australia has a population that is increasingly educated—higher levels of education are associated with higher levels of charitable bequest giving (James III 2009), and
  
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  Australia has an increasing proportion of its population who do not have children—childlessness has been shown to be the strongest demographic predictor of including a charitable bequest (James III 2013).
  

Australian context

Research

Research into charitable bequests in Australia remains limited, at least in part due to the resource-intensive nature of gathering reliable information (data) for analysis. In Australia there are no sources of panel data on the charitable bequest intentions of individuals, and no automated capture of distribution from Wills and probate files. Trend data on bequests are not available at a national level (McGregor-Lowndes, Flack, et al. 2014a).

Charitable bequests: a specific case of gift giving (Barnard 1995)

Data were gathered from deceased estates and through interviews with bequest officers from 15 different charities. The study found that: the average charitable bequest (A$35,870) was upwardly skewed by a small number of large gifts, single donors contribute less than married donors, individuals with less family are more likely to leave a charitable bequest, and that the average time gap between last Will and death was smaller for those leaving a charitable bequest.

‘Family comes first’: Fundraisers' perspectives on charitable bequests (Baker 2008)

Interviews with a sample of bequest fundraisers in Australia concluded that:

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  attitudes towards inheritance and charitable giving are overwhelmingly influenced by expectations of honouring family obligations, and
  
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  relationships individuals have with charitable organisations are less influential than family obligations when making estate distribution decisions.
  

Keeping Giving Going: Charitable Bequests and Australians (Madden and Scaife 2008b)

This study explored the differences in attitudes and behaviours of 1,000 Australian charity donors, approximately half of which had pledged to make a charitable bequest, and half had not. The findings concluded that those who pledge a charitable bequest:

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  explain their bequests in terms of family responsibilities
  
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  cite two major influences over their decision: perceiving the family to be already adequately provided for, and
  
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  having no family to provide for.
  

Motives and barriers to bequest giving (Wiepking, Scaife and McDonald 2012)

These two studies analysed survey responses from donors to a sample of major Australian charities. The 2010 published study found support for two indicators of likelihood that an individual would make a bequest:

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  belief in the effective stewardship of funds by the beneficiary organisations, and
  
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  a history of charitable generosity during the Will-maker’s lifetime.
  

The study published in 2012 confirmed that bequest giving behaviour and its associated motives and barriers are different to those of general, during life charitable giving.

Inheritance in Australia: Family and charitable distributions from personal estates (Baker and Gilding 2011)

This study involved a random sample of probate records in Victoria in 2006. The findings include: that decedents overwhelmingly leave their estates to their immediate family—first spouses and then children in equal measure; about one in five decedents exercise some measure of testamentary freedom; and that about one in 20 decedents leave a charitable bequest; that decedents without surviving children are more likely to include a bequest; and that (unlike in the US), wealthier decedents leave a smaller proportion of their estates to charity than their less wealthy counterparts.

Targeting wealthy donors: The dichotomous relationship of housing wealth with current and bequest giving (James III and Baker 2012)

Using data from the US and Australia, this study examined the interaction between the two core financial factors of total wealth and home ownership. The findings stated, inter alia, that as the share of total wealth held in home ownership rises, both the likelihood and level of charitable giving falls. This relationship is consistent across current giving, planned bequest giving and actual bequest giving.

Encouraging Charitable Bequests by Australians (Baker 2014)

This national study involved the manual collection of data from individual probate files in order to analyse how Australian estates are currently being distributed. The analysis covers 5% of all the files processed for probate in 2012 (3,793 individual files). Estates were categorised as: first estates (with a Will and a surviving spouse), final estates (with a Will and no surviving spouse) and intestate estates (no valid Will). The findings include:

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  intestate estates made up 10% of all estates in the study and 6% of the net value of all estates
  
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  the four distinctive features of intestate estates are consistent with an earlier study of Victorian probate files (Baker and Gilding 2011) also hold for this larger national sample. Compared to Willed estates, those who died intestate were younger, less wealthy, less likely to have children are more likely to be male
  
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  the average age of the owners of estates in this study was 81.4 years, nearly 30% were 90 years or older at the time of their death
  
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  3.8% of first estates (with a Will and without a surviving spouse) included a charitable bequest
  
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  7.6% of final estates (with a Will and without a surviving spouse) included a charitable bequest; 1.3% included an unrealised contingent bequest (i.e. no gift eventuated)
  
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  the average charitable bequest from final estates was A$185,000, while the median was A$10,000
  
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  as with the findings of Barnard (1995), the average was upwardly skewed by a few very large bequests
  
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  the largest two bequests provided 39% of all charitable bequest value and the largest five accounted for 52%
  
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  94.1% of final estates with surviving children do not leave a charitable bequest; the average for those that did include a bequest was A$2,000
  
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  30% of final estates with no surviving children did leave a charitable bequest, with an average value of A$21,000, and
  
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  less than one in five (18.3%) of the highest value final estates make some form of monetary charitable bequest and the share of higher-value estates directed to charitable bequests is not statistically different to the share gifted by lower-value estates.
  

The timing of final charitable bequest decisions (James III and Baker 2015)

This study made use of the probate data from Australia (Baker 2014) and longitudinal survey data from the US to investigate the timing of decisions that result in realised charitable bequests. Charitable transfers are found to result mostly from decisions that happen during the last five years of life and at the oldest ages.

Will-making prevalence and patterns in Australia: Keeping it in the family (Tilse et al. 2015b)

A national telephone survey in 2012 with 2,405 respondents found current social norms indicate a narrow view of what and who constitutes ‘family’, a limited sense of reciprocal obligation for end-of-life care, and limited commitment to charitable organisations and civil society evident in contemporary Will-making. Specific findings include:

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  Wills are predominantly used to distribute assets to partners and/or equally to immediate descendants
  
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  there is little evidence that Will-makers are recognising relationships and obligations outside the traditional nuclear family, and
  
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  only a minority consider bequests to charities as important.
  

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