Leaving Money in a Charitable Trust or Will (Part 2)

Why should you contact the charity that you are planning to name as beneficiary?

People often wish to leave money to charities. This blog contains real-world scenarios in which individuals leave assets to charities:

Example #1: Tom has no children and no living relatives. His net worth is about 10 million dollars. Realizing his estate would be taxable, he wanted to strategically make a bequest to his alma mater, the church that he attends, and a hospital that he credits with saving his life.

He contacted his alma mater to inform them of his intentions. He signed a letter of intent specifying the dollar amount of the gift he intended to leave. As a result, the college named an endowment after him, with the funds to be used to create a scholarship.

He spoke with the pastor at his church about his intentions, and he was able to hear about the good work that the church will be able to do as a result of his gift.

He also wished to leave a gift to a hospital where he was a patient earlier in his life. He met with the hospital’s board of directors and some physicians to ask them what the hospital needed most. He signed a letter of intent addressed to the hospital, which named a new medical center after him.

The gifts specified in Tom’s Last Will and Testament will help result in significant estate tax deductions for his taxable estate. These deductions along with the other administrative expenses will likely result in his estate falling below the federal exemption. In addition to avoiding a federal estate tax liability, Tom had the satisfaction of knowing that his gifts would help benefit others, and that his legacy would live on. These are just some of the benefits of contacting charities ahead of time.

Example #2: Ellen was a member of a religious organization and wanted to leave funds to an affiliated orphanage in a developing country. She placed the money in a charitable trust for the benefit of the orphanage. After she passed away, her fiduciary discovered that the orphanage did not meet the specific requirements of the Internal Revenue Service (IRS) to qualify as a charity for purposes of claiming a tax deduction.

Ellen had a taxable estate with accrued income. If the funds had gone to a non-profit organization, or a charity recognized by the IRS, it would have decreased the amount of the taxable estate or the estate fiduciary income tax liability. From Ellen’s point of view, none of this would have made a difference, as she still would have given the money to the orphanage. However, had she been aware of the status of the orphanage, she could have planned ahead and made other accommodations to ensure a similar deduction be made.

Example #3: Ruth left 5 percent of her estate to a charity and the rest to her family. Since a charity was bequeathed a percentage, the New York Attorney General’s office (NYAG) had jurisdiction, and was entitled to an accounting of the actions taken by the executor. After NYAG reviewed the accounting, it objected to some actions taken by the executor.

The objections then need to be negotiated with the Attorney General’s office. As a result of using a percentage instead of a specific amount, the few thousand dollars that the charity received ended up costing the family many more thousands of dollars in legal fees.

Ultimately, everybody else named in the will received a decrease in their distribution. You should speak with an experienced Estate Planning Attorney when thinking about giving a residuary request to a charity, as it may make more sense to designate a specific dollar amount instead.

Example #4: Sally had five nieces and nephews, and she was very involved in five different charities. Acting upon the advice of good counsel, she designated a specific amount to the five charities and left the residuary balance to her family.

The executor was able to provide the charities with the specific dollar amounts that they were bequeathed, without involving the New York Attorney General. The charities accepted the assets from the estate and issued gracious thanks to the executor of the estate, which gave Sally’s nieces and nephews great pleasure.

These examples demonstrate the many benefits and pitfalls of leaving assets to charities. If you plan to leave assets to a charity, consulting with a trust and estate attorney could avoid costly mishaps and delays. Have you investigated your target charity?