Leaving bequests at your death to charitable causes that are important to you is an option not limited to the ultra-wealthy. Many people, regardless of their level of wealth, prefer to direct assets to charitable causes meaningful to them through their wills, certain kinds of trusts, or qualified retirement plans or IRAs at their deaths rather than during their lives. Making charitable gifts at your death has the obvious benefit of allowing you full use and enjoyment of your assets during your life. Current federal and state laws offer various options to accomplish this, with favorable tax benefits.
A savvy estate planning and tax attorney will help you evaluate the best options for you, given your personal objectives and tax consequences, and carefully consider the scope and kinds of assets you own. Each planning situation is unique and deserves special consideration.
Strategies other than current cash gifts to desired charities allow you to make current or deferred gifts during your life. Examples include gifts of appreciated stock, charitable gift annuities, donor-advised funds, certain trusts such as charitable remainder trusts and charitable annuity trusts, and the creation and funding of a private foundation. Though not the focus of this article, these are important options deserving consideration.
As with any bequest or other gift to a charitable organization, your attorney should confirm that the organization is, in fact, recognized as tax-exempt by the Internal Revenue Service (IRS) and by the Pennsylvania Bureau of Corporations and Charitable Organizations.
The most obvious vehicle by which to fulfill your charitable wishes at death is through your will, in the form of a bequest of a specific dollar value or a percentage of your residuary estate (that is, your estate after all applicable taxes and expenses are paid). Either kind of bequest will generate a charitable Pennsylvania Inheritance Tax deduction and Federal Estate Tax deduction in the amount of the date of death fair market value of the bequest. Including charitable bequests in your will would appear to be the simplest and most effective option. But is it?
The following are recommendations that deserve your careful consideration before you include a charitable bequest in your estate plan.
- Consider using your Qualified Retirement Plan or IRA to fulfill your charitable wishes at your death. Too often, using your qualified retirement plan (for example, 401(k), 403(b), or other employer-sponsored plan) or your IRA is overlooked as an efficient and tax-savvy manner of giving to charity at your death. Naming the charity as a beneficiary of a portion of your retirement plan will, in addition to providing your estate with a deduction for PA Inheritance Tax and Federal Estate Tax purposes, maximize the amount passing to that charity because charitable organizations that are recognized as Tax Exempt by IRS and the PA Bureau of Charitable Organizations—unlike any individuals you name as beneficiaries of such retirement plans–will pay no Federal or PA income tax on such inherited plans.
In addition, bequests to charities through beneficiary designations of your retirement plan are highly efficient. They can be completed relatively quickly after your death, without the involvement of your estate and the probate process. Your charitable bequest will not necessitate review by the Charitable Trusts and Organizations Office (CTTO) of the Pennsylvania Attorney General.
- Remember to include any restrictions on using your bequest by the charity. Discuss with your attorney any specific wishes you have as to how your bequest will be used. If the bequest does not include such restrictions, the organization may use the gift as it desires for its general purposes.
3. Understand the legal process and timeline that will be required for any charitable bequests made through your will or a trust after your death. Many, if not most, charitable bequests made through your will or trust will require your estate and trust attorney to notify the CTTO of the Attorney General of such bequests. Bequests of a specific dollar amount will require less documentation and legal work to be provided to the CTTO than will a gift of a percentage of your residuary estate. The latter will require the submission of detailed financial information for review by the Attorney General before allowing distribution of the bequests to any beneficiaries.
Judith A. Harris, LL.M (Taxation) is an attorney and equity member of Norris McLaughlin, P.A in its Allentown office. She co-chairs the Firm’s Estate, Trust, and Tax Law practice group and focuses her work on wills, trusts and taxation, estate and trust administration, business matters, and tax-exempt entities.
