Charitable bequests and how to structure them

Leaving money to charity is straightforward. Doing it efficiently requires deciding which assets go where, and the difference is substantial.

The single most useful principle

Leave tax-deferred retirement accounts to charity and other assets to individuals.

The reasoning is direct.

A charity receiving a traditional retirement account pays no income tax on it, because charities are exempt.

An individual receiving the same account pays ordinary income tax on every dollar withdrawn, and under current rules most non-spouse beneficiaries must withdraw the whole balance within a limited number of years — frequently during their highest-earning period.

Meanwhile, taxable assets left to individuals generally receive a basis adjustment, eliminating capital gains tax.

So the same total gift, allocated the other way round, delivers substantially more to both the charity and the family.

This costs nothing to arrange: it is a beneficiary designation on the retirement account and a bequest in the will of other assets.

The ways to leave a gift

A specific bequest of a stated sum or a named asset.

Simple, and it does not adjust if the estate turns out to be smaller than expected — a fixed bequest can consume a disproportionate share of a diminished estate.

A percentage of the residue, which scales with the estate and is generally the more robust approach.

A contingent bequest, taking effect only if other beneficiaries predecease.

A beneficiary designation on a retirement account or insurance policy, which is the most efficient route for those assets and requires no will amendment.

A donor-advised fund, which can receive a bequest and allow successor advisers — frequently children — to direct grants over time.

This is a way of involving the next generation in giving without committing to a private foundation.

Lifetime giving from an IRA

Worth mentioning alongside bequests.

From a specified age, IRA holders can direct distributions to qualifying charities, excluded from taxable income and counting toward required minimum distributions.

Excluding income is better than deducting it, particularly for the large majority who take the standard deduction and receive no benefit from charitable deductions at all.

The rules are specific: direct transfer, annual limits, and donor-advised funds and private foundations do not qualify.

Charitable trusts

For larger gifts, two structures with opposite shapes.

A charitable remainder trust pays income to individuals for a term or for life, with the remainder to charity.

Contributing a highly appreciated asset allows it to be sold inside the trust without immediate capital gains tax, producing an income stream from the full value.

Useful for concentrated appreciated positions where the owner wants income and a charitable outcome.

A charitable lead trust reverses it — income to charity for a term, with the remainder to family.

Used primarily for transferring assets to the next generation at reduced transfer tax cost.

Both involve real complexity, setup and administration costs, and irrevocable commitments, and they suit substantial gifts rather than modest ones.

Charitable gift annuities, offered directly by many institutions, are a simpler arrangement providing fixed payments for life with the remainder to the organisation.

The practical drafting points

Name the charity precisely, including its full legal name, location and identifying number.

Similar names cause genuine disputes, and organisations merge, rename and occasionally cease to exist.

Include a gift-over provision directing what happens if the named organisation no longer exists.

Consider whether to restrict the gift. Restrictions can render a gift unusable if circumstances change, and unrestricted gifts are generally more valuable to the organisation.

Where a restriction matters, discussing it with the organisation in advance avoids a gift they cannot accept.

Tell them. Many organisations have legacy programmes, and advance notice allows planning and acknowledgement.

The family conversation

Worth having.

Substantial charitable bequests occasionally surprise families and produce resentment, particularly where the amount is large relative to what individuals receive.

Explaining the intention during life removes the discovery, and frequently the objection with it.

General information only, not legal or tax advice. Consult a qualified estate attorney and tax professional about your own circumstances.