By Eileen Y. Lee Breger, Associate, Bowditch Attorneys; Eileen concentrates her practice on estate planning, tax strategies, special needs planning, long-term care planning, and estate and trust administration.

Many individuals would like to include charitable gifts as part of their estate plan. How a person provides for a charity upon their death can take on different forms depending on the individual’s personal preferences, stage of life, asset profile and lifetime financial needs. 

To illustrate a few planned giving options that are available to you, we’ve outlined a hypothetical story of Michael who is meeting with his estate planning attorney to discuss how best to leave a legacy gift to the Carroll Center for the Blind. 

Gift in the Estate Plan Documents

Michael could provide for a charity in his estate plan documents, either in a Will or Revocable Trust (which is a Will substitute). This could be done by leaving a fixed dollar amount to a charity, such as $50,000. If Michael is concerned that the value of his estate may decrease before his passing (due to long-term care expenses or economic downturns), he may want to consider leaving a percentage of his estate to charity instead of a gift with a fixed dollar amount. Another option to guard against estate diminishment is to include a provision in his documents that will leave a dollar amount or a percentage of his estate to the charity, whichever is less.

Retirement Accounts are the Perfect Asset to Leave to a Charity

A wonderful way to maximize the income tax efficiency of Michael’s estate plan would be to name a charity to receive a portion of Michael’s income tax-deferred retirement plan on a beneficiary designation form.  This is tax-advantageous because the charity will not pay income tax on its distribution from the retirement plan and receive the full value of the gift. In addition, an administrative benefit of naming a charity directly as beneficiary on a retirement account is that Michael can easily update the charity or the amount left to the charity by filling out a new beneficiary designation form.  This can save the time and expense of having an estate planning attorney update a Will or Revocable Trust. However, Michael should keep an eye on the value of his retirement account and make sure the allocation to the charity does not need to be adjusted over time.

Charitable Remainder Trust

If Michael has lifetime needs and wants to reduce his estate tax exposure, he could use a charitable remainder trust to make a gift to charity. In this case, he would transfer selected assets to a trust now but retain a lifetime annuity payment or unitrust payment. In Michael’s case, he has personal residence property in California that he no longer wishes to keep, so he could contribute the California property to the Trustees of the charitable remainder trust. When the trust sells the property, it will pay no capital gains tax, allowing the full value to be invested for the beneficiaries of the trust. Such a trust could provide Michael (and his spouse or another family member) with lifetime income, with the balance to be paid to the charity at the death of the lifetime beneficiary. Also, Michael can reserve the right in the trust instrument to change the identity of the charity, giving him the flexibility to determine the ultimate beneficiary of the trust funds.