How to Leave an Estate to Charity

Many people who accumulate significant wealth enjoy setting aside some of their estate for a good cause they’re passionate about. In some cases, they leave a significant portion or even all of their estate to charity. If the idea of leaving your estate appeals to you, there are several different ways to leave your assets to a charity. Here’s what you should know.

CHARITABLE BEQUEST

This one is straightforward. A bequest is a statement in either your will or trust that details what, and the amount, you’d like to leave to the charity. That could be investments, property, autos or other assets. Bequests are just gifts made as part of your will or trust and can be made by anyone and for any amount. However, you’ll want to work with an attorney to accurately convey your wishes to ensure your donations reach the charity and your funds are used for the purpose you desire.

Generally, there’s no limit to the number of charitable bequests against the value of an estate (but you need to make sure you designate how your estate is distributed among charities), making them a powerful tool for reducing estate tax.

NAME CHARITY AS A BENEFICIARY

Just as you can name a spouse or other relative as a beneficiary of your IRA, 401(k) or life insurance, you can also designate a charity. To do that, you simply complete a designated beneficiary form for your account. Because your beneficiaries receive those retirement assets at the time of your death, there are a few tax advantages. 

Charities don’t pay income tax, so the full amount designated from your retirement accounts will benefit the charity you choose — maximizing your donation. While those assets given to charity will need to be included in the gross value of your estate, it’s considered a tax deductible, charitable contribution that can offset estate taxes for your heirs (keep in mind, most estates are not taxable under the current high estate tax exemption of $11.58M as of 2020).

While there are potential tax savings when you leave a retirement account to charity, life insurance proceeds are generally tax free. Therefore, a person could leave their retirement savings to charity while leaving their tax-free life insurance to individuals.

DONOR-ADVISED FUND

A donor-advised fund is another effective charitable giving strategy. A donor-advised fund is a grant-making account held by a public charity — it’s like an investment account with the sole purpose of donating to charities. You make donations to the fund and the charity agrees to consider the donor’s investment and distribution requests. The donor advised fund handles all the financial and management tasks, which frees you from administrative legwork. You can donate cash, stocks or non-publicly traded assets such as private business interests to be eligible for an immediate tax deduction. 

Essentially, this allows you to make a large deductible charitable gift in a single year, without needing to identify all the charitable recipients immediately. In turn, you make grant requests to the charity in that year, or in any subsequent year even if you make no contribution in those years. When you die, assets from your estate can be contributed to the fund and dispersed to charities you’ve designated.

TRUSTS

Charitable Remainder Trust: This is a so-called split-interest charitable giving technique, which means a portion benefits the charity and a portion benefits you. When you transfer assets to a CRT, you retain a stream of income from the trust for a designated term. When the term expires, the remaining assets are passed on to the charity. If you create and fund the trust during your lifetime, you'll receive a current charitable income tax deduction for the present value of the remainder passing to charity at the end of the term.

Charitable Lead Trust: This is also a split-interest charitable giving technique, with a key difference. When you transfer assets to a CLT, the charity receives a stream of income from the trust for a designated term. However, when the term expires the assets transfer to your beneficiaries rather than the charity. In some situations, transferring assets creates a current charitable income tax deduction.

PRIVATE FOUNDATION

This is charitable organization funded by primarily by you, your family or small group of donors. It differs from a public charity because it isn’t funded by contributions from the public. A board oversees contributions, investments and distributions and grants to public charities. While it offers the donor a greater degree of control, it’s a bit more complex.