Posted On: OCTOBER 2024
If you’re charitably inclined, you generally have two options for making charitable donations: lifetime gifts or charitable bequests at death. There are pros and cons to each approach.
Lifetime gifts vs. charitable bequests
Lifetime gifts allow you to enjoy the fruits of your philanthropic efforts while you’re alive. Charitable bequests, on the other hand, can be a great way to create a legacy. They may also be preferable if you’re not comfortable parting with too much of your wealth during your lifetime.
From a tax perspective, charitable bequests may have certain advantages over lifetime gifts. When you leave money or property to a qualified charity in your will, your estate enjoys an unlimited estate tax charitable deduction.
Lifetime gifts, on the other hand, offer both income tax and estate tax benefits. Not only are you entitled to an immediate income tax deduction (subject to applicable limits), but the value of the money or property (plus any future appreciation) is removed from your taxable estate.
Of course, estate taxliability is an issueonly if the value of your estate will exceed the federal gift and estate tax exemption. Currently, the exemption amount is $13.61 million. However,it’ll drop to $5 million (adjusted for inflation) in 2026 unless Congress acts.
Preserving the estate tax charitable deduction
If you wish to make charitable bequests in your will, and estate tax liability is a concern, careful planning is needed to avoid pitfalls that can jeopardize the estate tax charitable deduction. Generally, the gifted assets must be:
If you give your executor or beneficiaries the discretion to distribute assets to charity, those gifts won’t qualify for the estate tax charitable deduction. However, beneficiaries may qualify for an income tax deduction.
The charitable bequest must be “ascertainable” at the time of your death, otherwise the estate tax charitable deduction may be denied. Generally, that means a qualified charitable recipient must be specified in your will (although it may be possible to make a bequest to an unnamed charity depending on applicable state law).
The amount of the bequest must also be specified. That means your will must leave a certain dollar amount, a specific asset or a percentage of your estate to a charity. It’s also possible to leave the estate’s residue — that is, the amount left after all assets have been distributed to heirs and final expenses have been paid — to a charity.
A common pitfall in drafting charitable bequests is the failure to properly identify a qualified charitable recipient. Even if the bequest is correct at the time you draft your will, things can change over time. For example, a charity may change its name, merge with another organization, lose its tax-exempt status or cease to exist. For this reason, it’s a good idea to name one or more contingent charitable beneficiaries in the event the primary charitable beneficiary can’t accept the donation.
Preserving your legacy
There are many other ways to create a charitable legacy. They include establishing a lifetime or testamentary charitable trust, creating a private foundation, or investing in a donor-advised fund. We can help you design a charitable giving plan that has a lasting impact while maximizing tax efficiency.
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