Many people give generously to charitable organizations during their lifetime. According to Giving USA 2017, the Annual Report on Philanthropy, in 2016 Americans contributed an estimated $390 billion to charities, about 72 percent of which came from individuals. Yet many people don’t consider charitable organizations as potential beneficiaries of their assets at death.
Why is that? There are several reasons. Planning a charitable gift at death (often referred to as a “bequest”) requires … planning. That means deciding how your assets should be distributed on your death, having an estate plan in place that carries out those decisions, and reviewing the plan once every few years. Thinking and talking about what happens when you die can be unpleasant, so people avoid it.
Many people don’t think they are wealthy enough to make a charitable bequest on their death. Understandably, your first priority is to make sure your loved ones are adequately provided for. However, when you consider life insurance, IRAs, equity in your home and other real estate, bank accounts, and all of the other assets available to be distributed on your death, you may be surprised to find that you can provide for both your family and charities that are important to you. And a charitable bequest doesn’t have to be millions of dollars.
So how do you make a charitable bequest? First, you need to identify which charities to include as beneficiaries. Maybe you want to make a number of bequests to different charities you’ve supported during your lifetime, either financially or by volunteering your time. Maybe you would rather make one larger bequest to a single charity. Maybe you want to create a fund with a community foundation or charitable trust which can benefit a number of charities based on need and other factors.
Once you make that decision, you need to implement it. How that is done will depend on your estate planning documents and assets. If you want to make a cash bequest, you can direct the distribution of a specific dollar amount to charity in your will or revocable trust (just make sure there will be assets available to your estate or trust to fulfill the bequest). If you want to protect your other beneficiaries by making sure the bequest to charity doesn’t exceed a certain percentage of your assets, then consider stating the bequest as a percentage (for example, “$10,000, not to exceed 2 percent of my estate”).
If you want to leave a certain asset (for example, real estate) to charity, you can also do that in your will or trust. (However, you should ask the charity in advance whether it will accept that asset.)
If you have a traditional IRA or other type of pre-tax retirement account, consider leaving a portion of it to charity. Distributions from these accounts to non-charitable beneficiaries will be subject to income taxes. Charities, on the other hand, don’t have to pay income tax on these distributions, so funding a charitable bequest using your IRA and giving other assets to your non-charitable beneficiaries can save them income taxes. Leaving a portion of an IRA to charity is as simple as listing the charity as beneficiary of a percentage of the IRA (you can also split an existing IRA to create a separate IRA that passes solely to the charity).
Remember that you can change a charitable bequest made through your estate plan at any time prior to your death. This allows you to review the bequest periodically to make sure that you are still satisfied with both the recipient and amount.
If you decide to leave a charitable bequest in your estate plan, keep in mind the following:
1. Make sure you use the correct legal name of the charity. Include the charity’s federal taxpayer identification number in the document making the bequest.
2. Consider how you want the bequest to be used by the charity. For example, are you comfortable with the charity using the bequest to fund its operations? If you want to restrict what the bequest will be used for, talk to the charity to find out if the restriction is acceptable and direct what happens if the charity won’t accept the bequest subject to the restriction.
3. If you want the bequest invested to generate income that can be used to support the charity’s activities in perpetuity, find out whether the charity has a separate endowment that the bequest should be made to. If not, it may be possible to make the bequest to a community foundation or a charitable trust that will carry out your wishes.