It is inconsistent that so many generous folks, who relished giving during their lifetime, leave nothing at their death to their favorite charities. Perhaps it can be assumed that they meant to make provisions but were not sure how. The following are examples of problems that cause procrastination, and solutions to those problems.
This is a philosophical question, yes, but it is also a math question. Jane Doe needs to ask herself if she would like to replace her annual giving with a similar flow after her death. If yes, she should multiply her annual gift by 20 and leave that amount to an endowment that distributes 5% annually to the charity.
Because Jane’s normal annual gift is $3,500, her number would be about $70,000. Fortunately for Jane, her charity has its own endowment. If it did not we would suggest she consider an endowed fund at her local community foundation, The Foundation For The Carolinas.
Jane is not comfortable leaving a set dollar amount to charity in her will. Sure, $70,000 might not seem like a big chunk of her money today, but what if $70,000 is all she has left at her death? Does Jane really want to disinherit her children of the last morsel of her estate? On the other hand, what if her assets triple in size and now $70,000 is too small an amount?
A solution: Jane substitutes a percentage (%) for the dollar ($) amount. If $70,000 is 3% of the estate at the time the will is drawn then maybe 3% should be the designated amount. That way, if Jane grows wealthier, the dollar equivalent of 3% increases, and if the estate is halved due to expenditures, then the amount to charity is also halved.
What if Jane accepts the percentage idea but also wants to ensure that their charity gets at least a minimum amount or no more than a maximum amount? The attorney could put in a “floor and ceiling” provision that states that “3% but no less than $30,000 and no more than $120,000” should pass to the charity. Now Jane’s estate can grow or shrink and the charity will be remembered either way. For good measure, Jane can add an inflation bump to the dollar brackets so that the documents will not become dated.
Jane may choose to provide for her charity via a provision in her will or via beneficiary designations on an IRA or insurance policy. (If implemented correctly, the IRA can be an ideal source of charitable currency at death. See separate article: Wise Charitable Giving Via Beneficiary Designations.) It is extremely important that Jane knows that assets passing by beneficiary designation will not be governed by her will unless those assets are left payable to her estate.
Although seemingly simple, designating assets to pass to charities outside of Jane’s will (outside of probate) can cause confusion and, furthermore, the gift might fail to accomplish the original goal. For example, if Jane lives a long, long time, her IRA may be nearly depleted when she dies. Also, the insurance policy could lapse. What if Jane’s Attorney in Fact unwittingly causes the failed gift by using the IRA designated to charity over other assets to provide for Jane’s expensive end of life care?
To address these risks, Jane’s capable estate planning attorney might include language in her will stating something like this: “Taking into consideration the assets passing to charity by beneficiary designation (outside of probate), it is my intention that my charity receive no less than 3% of my total estate…” In other words, to the extent Jane’s IRA or insurance policy does not create a charitable gift of at least 3%, the executor can take the rest from Jane’s probate assets – those assets that are controlled by the will. An added advantage to this belt and suspenders approach: Jane does not have to revisit the terms of her will and beneficiary designations when the account values change. In short, Jane would be wise to coordinate the disposition of her probate assets with the disposition of her non-probate assets.
Jane may want to provide for heirs and charity over differing periods of time. For example, she may wish to create a temporary “endowment-like” income stream for her charity but ultimately keep the assets in the family. She could accomplish this with a charitable lead trust that would pay an income stream from the trust to the charity for a term of years, after which her other heirs would receive the principal.
Alternatively, she might want to provide her heirs with a stream of income for a term of years but then have the remaining capital pass to the charity. Jane can accomplish this with a charitable remainder trust.
Both of these instruments, the lead trust or the remainder trust, can be created at death per Jane’s documents or during her lifetime. (In addition, for smaller structured gifts, many institutions offer gift annuities that can accomplish much the same thing as a remainder trust.) Importantly, these strategies offer significant income and transfer tax advantages but this is beyond the scope of this article.
Jane’s wishes for her charity can come true without compromising the inheritance she wishes for her other heirs. The first step is some soul searching, followed by some math. Then there is a consideration of “sources” for the gift and a coordination of instruments that will make the gift happen – the will and the beneficiary designations.
Using a skilled estate planning attorney is essential. A helpful financial advisor who is knowledgeable in estate and income tax planning and good with numbers is a must as well. Call us if you would like a review of your charitable plans. Don’t wait until it’s too late!
This information is believed to be accurate but should not be used as specific investment or tax advice. You should always consult your tax professional or other advisors before acting on the ideas presented here.