Our friends at Ellen Williamson Law, PC discuss how many people want part of their legacy to support a cause they care about. Charitable giving in an estate plan can be as simple as a single sentence in a will, but how a gift is structured, and which asset funds it, can make a real difference in how much reaches the charity and how much the family keeps. A trust lawyer can help you structure charitable gifts within an estate plan while considering how different assets may affect both the charitable gift and the inheritance left to your family.
Gifts Through a Will or Trust
The most familiar approach is a charitable bequest in a will, or a similar provision in a trust. These gifts typically take one of three forms:
- A specific dollar amount.
- A percentage of the estate.
- A share of the residue, meaning whatever remains after specific gifts, debts, and expenses are paid.
Percentages tend to age better than fixed amounts. A $50,000 gift written when an estate was worth $2 million can take a much larger share of the estate if its value later drops, leaving family members with less than intended.
Why Retirement Accounts Are Often the Best Asset for Charitable Giving
Not every dollar in an estate is taxed the same way. Money in a traditional IRA generally hasn’t been taxed yet, so individuals who inherit it usually owe income tax as they withdraw it. A qualified charity, by contrast, is generally exempt from income tax and can receive the same account without losing any of it to taxes.
That difference creates an opportunity. Rather than leaving cash to charity and a retirement account to family, a person can name the charity as a beneficiary of the retirement account and leave other assets, which often carry little or no income tax burden for heirs, to family members. The charity receives the same amount either way, and the family keeps more.
These gifts are made through the account’s beneficiary designation, not the will, so the designation needs to be coordinated with the rest of the plan.
Giving During Life From an IRA
For people age 70½ or older, a qualified charitable distribution allows money to move directly from an IRA to a charity without being counted as taxable income, up to an annual limit that is adjusted for inflation. The IRS explains the requirements in Publication 590-B. Lifetime giving also lets the donor see the impact of the gift.
Getting the Details Right
A few practical points help gifts reach their intended recipient:
- Use the charity’s full legal name and, ideally, its tax identification number. Many organizations have similar names, and the IRS Tax Exempt Organization Search can help confirm the right one.
- Plan for change. Charities merge, change missions, or dissolve. Naming an alternate, or giving the executor or trustee authority to redirect the gift to a similar organization, keeps it from failing.
- Think carefully about restrictions. A gift limited to a narrow purpose can become hard to use decades later. Talking with the charity about how it handles restricted gifts can head off problems.
More Complex Options
For larger estates or specific goals, charitable remainder trusts, charitable lead trusts, and donor-advised funds offer ways to combine giving with income for the donor or family, along with potential tax benefits. These tools carry more complexity and are worth exploring with an attorney and tax advisor.
The Bottom Line
A charitable gift reflects values as much as finances. Choosing the right asset, structuring the gift so it holds up as circumstances change, and coordinating beneficiary designations with the rest of the plan helps that generosity do as much good as possible.