Including Charity in Your Will: What You Should Know About Estate Planning and Giving

By Jasmine Howard

Including Charity 1You’ve probably heard the expression “you can’t take it with you,” in relation to your personal wealth after you pass away. It’s why most people draw up a last will and testament, outlining what they wish to happen to their money and valuable possessions upon their death. While most people leave at least some of their estate to their family, many people also provide gifts to charity via their wills.

While it might sound simple to say “Donate X” to a specific organization after your death, it often isn’t that simple, especially when it comes to large gifts and gifts of property. Tax considerations — both before and after your death — are of great concern to everyone involved, and questions about how the gift should be used, and whether the organization can even accept the gift at all, must be answered before such decisions are made.

It is best to work with qualified legal counsel and a financial planner before making any decisions about your final wishes, but knowing a few important points beforehand can help your decision-making.

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What Happens to Your Estate When You Die

If you were to believe Hollywood, the process of dividing up an estate begins with the reading of the will to an assembled group of people who expect to be named in the document — and they either walk away pleased or unhappy with the dictates of the document. In reality, it’s not quite that simple.

In many cases, a deceased’s estate must go through probate. The probate process essentially determines who receives which assets, and transfers ownership of those assets. For smaller estates, meaning those with a value of less than $100,000 after subtracting real estate, the process is generally simplified, while higher-value estates often have to go through a complex process that costs time and money. There are some exceptions to probate laws, though. If assets are jointly held, such as those owned by a husband and wife, they automatically transfer to the surviving owner. Assets held in trust, or that have a named beneficiary (like a life insurance policy or a retirement plan), are also exempt from probate.

So why is this important when making charitable gifts? For several reasons. First, it’s possible that your heirs could contest your will during the probate process, delaying or cancelling your gift. The more likely problem, though, is that the probate process will reduce the value of your estate thanks to the legal fees and estate taxes that result from probate. This reduces the value of your gift — and the value of assets your heirs receive.

Including Charity 2Avoiding the Probate Question

While probate is common, it doesn’t have to happen. Many people who wish to make gifts to charity after their death (also known as bequests) make other arrangements prior to their death in order to maximize their contributions, reduce estate taxes, and ensure their heirs are taken care of as well.

Some of the most common means of making charitable gifts after death include:

• Naming an organization as a beneficiary to your 401(k) retirement plan or life insurance policy. You can designate a specific dollar amount or percentage of the account to be donated.

• Establishing a trust with the charity named as the beneficiary.

• Creating a charitable gift annuity, which provides both a source of income and a tax deduction while supporting the charity.

• Gifting real property, such as donating a boat or vehicle, artwork, or other item of value to the organization.

Each of these options has its own benefits and drawbacks, but most will limit your tax burden.

Additional Considerations

Most charities welcome bequests, but few like surprises — especially when it comes to gifts of property, or when gifts come with strings attached like provisions for their use. If you have a specific purpose in mind for your gift, it’s best to discuss your thoughts with the charity in advance to prevent misunderstandings and misappropriation of your assets. Charities also like to be able to plan for major gifts (even if they don’t know exactly when they will be coming) and might have some insights that will help you maximize your gift and reduce your tax burden.

It’s very important that you discuss gifts of property in advance. Not all charities are equipped to accept gifts of physical property, even if they seem insignificant. If the charity cannot accept your gift, it might have some other ideas (such as selling the property and donating the proceeds) for you to support them.

Again, work with your attorney to determine the best way to handle your estate and make charitable gifts. With advance planning, you can both support an organization that you care about and provide for your heirs without creating a tax burden.

About Retire Early Lifestyle

Billy and Akaisha Kaderli retired three decades ago at the age of 38 and began traveling the world. As recognized retirement experts and internationally published authors on topics of finance and world travel, they have been interviewed about retirement issues by The Wall Street Journal, Kiplinger's Personal Finance Magazine, The Motley Fool Rule Your Retirement newsletter, nationally syndicated radio talk shows and countless newspapers and TV shows nationally and worldwide. They wrote the popular books The Adventurer's Guide to Early Retirement (Your Simple Path to FIRE) and Your Retirement Dream IS Possible.
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