Charitable Bequests: Where There’s a Will, There’s a Way

MacKenzie Scott made big waves last year when she donated over $8.5 billion in three rounds of charitable giving, setting the record for the largest distribution by a living individual to working charities. But not all donors who wish to support cherished charitable organizations are ready to give away assets today.

Fortunately, there is a simple way to give without impacting your day-to-day finances. It’s called a bequest. A bequest is a way to leave money to charity through your will or trust after your death. It costs nothing now, but it can support the organization’s future while leaving a lasting legacy. In fact, donors often choose to honor friends or family members by creating a memorial fund in their name.

Not surprisingly, bequests are the most popular type of planned gift. According to the Giving USA 2021 report, donors bequeathed an eye-popping $41.91 billion to charity in 2020. That represents 9% of all charitable gifts made in 2020—and more than double the amount given by large corporations.i What’s more, last year’s figure is just the latest in a long upward march, demonstrating the enduring popularity of this approach (Display).

Donor Interest in Charitable Bequests Continues to Grow

 

Bequests Are Easy

There are several reasons donors are attracted to this planned giving strategy. First, making a bequest is easy. Simply include a bequest provision when creating or revising your will or revocable trust. You can even add the provision to an existing will through a codicil. Many nonprofits will provide sample language. For example, “I give and bequeath the sum of $XX to the ABC Charitable Foundation, a nonprofit corporation located at . . ., to support its charitable purposes.” Be sure to consult your estate attorney for assistance in formalizing your intentions.

Bequests Are Flexible

The example above, called a general bequest, is the most common type. It typically calls for a dollar amount to be paid to an organization from the estate’s general assets. But donors have great flexibility in terms of structure, including the ones below:

  • A specific bequest can be used to give a specified property or asset. Be careful though—if the specified property is no longer owned at death, the intended beneficiary may end up with nothing. 
  • A demonstrative bequest can be used to make a specific distribution from a named source or account. 
  • A residuary bequest gives all or a portion of the estate that remains after the other bequests, debts, and taxes have been paid.

Here again, your estate planning professional can help you incorporate the type of bequest that works best for you.

Don’t Forget About Retirement Accounts and Life Insurance

IRA or qualified retirement plan assets can be very attractive to leave to charity. Consider that when IRA assets are left to family members, any distributions will be subject to ordinary income taxes, and the IRA assets may be subject to estate taxes, too (Display). 

Since retirement assets left to charity won’t be subject to the same tax burden, it often makes sense to leave such assets to charity and non-IRA assets to family members who net more after taxes. In this case, donors should simply name the charity on their IRA Designation of Beneficiary form.

IRA Assets Are Especially Attractive for Bequests

 

Alternatively, those who find they no longer need life insurance proceeds to replace their income or pay estate taxes, could consider naming their favorite charity as a beneficiary on a life insurance policy instead. This can be a great way to support the mission for decades to come.

What About Taxes?

A bequest passing to charity upon death qualifies for the unlimited estate tax charitable deduction.  However, bequests usually don’t provide a charitable income tax deduction, although there may be an exception if the governing will or trust document includes specific instructions. Here, the document must stipulate that if the will or trust makes a charitable bequest, then that bequest should be made first with income, including income in respect of a decedent (IRD).ii

This differs from the tax treatment of lifetime gifts which do qualify for a charitable income tax deduction. Your Bernstein Financial Advisor can walk you through the different options for giving now or later and recommend a course of action that’s beneficial from a tax perspective while maintaining your financial security. For more information on tax-efficient charitable strategies, you can also see Bernstein’s Philanthropy: Rooted in Your Values.

Author
Christopher Clarkson
Director—Wealth Strategies Group

[i] Giving USA 2021. The Annual Report on Philanthropy for the Year 2020: Key Findings. https://givingusa.org.

[ii] Hoyt, Christopher, Income Tax Deductions Charitable Bequests of IRD, 2015.

The views expressed herein do not constitute, and should not be considered to be, legal or tax advice. The tax rules are complicated, and their impact on a particular individual may differ depending on the individual’s specific circumstances. Please consult with your legal or tax advisor regarding your specific situation.

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