Writing your will is an opportunity to think about how you’d like people to remember you when you’re gone. For lots of families, that means choosing guardians and providing for children in the will. Another way to keep your legacy alive? Donating to charity.
Whether you call it a bequest, an endowment, a legacy, or simply a gift, money or assets you leave to charity can be a meaningful part of your final plans. No matter how large or small your estate is, there’s a way to leave a legacy to a cause you care about.
Donating to charity doesn’t always mean writing a check. There are a number of different ways to give back through your estate planning.
We at Fabric aren't lawyers. So, before deciding how to incorporate charitable giving as part of your estate plan, we encourage you to speak with a qualified legal professional about your specific needs and goals. (Do you need a lawyer to write your will?)
Any reputable charity can put a cash donation to good use. These are a few ways you can divide your money between your loved ones and favorite organization:
General gift: Name a specific amount of money or a percentage of your estate that should go to your preferred charity.
Residual gift: Designate how much of your estate should go to each of your other beneficiaries, and then send anything that’s left over to charity.
Contingent gift: You can choose to donate to charity as a backup plan, such as if your beneficiary passes away before you. The condition doesn’t need to be based on death, either. You could theoretically say that if your cousin goes to rehab and stays out of jail, he gets $10,000, but otherwise the money will go to an anti-addiction organization you support.
All you need to do is include a note in your last will and testament listing your chosen charities with the amount or percentage of your estate that they should receive.
You can donate most stocks, bonds or mutual funds directly to a charity. In fact, this option can be better for some organizations than if you sold the investment and donated the cash.
Tony Oommen, a charitable planning consultant at Fidelity Charitable, explains that donating the investment directly can eliminate capital gains taxes. The value here is that the charity ends up getting more money than if you’d cashed out the investment and donated the after-tax dollars.
This method of giving might work best for larger charities that have the brokerage relationships in place to transfer stocks or other publicly held securities efficiently. A smaller charity might welcome a stocks donation, even if it means they need to hire someone to help manage the transfer. Or they might prefer cash. When in doubt, call the charity you have in mind and ask what kind of gift is easiest for them.
Like this option? Contact your favorite charity and ask what the steps are to initiate a “transfer in kind” donation of investment accounts.
You can name a charity as a beneficiary on a life insurance policy. Most life insurance providers let you customize what percentage of a life insurance payout goes to each beneficiary, so you can split beneficiary shares however makes sense to you.
Some policies also offer a charitable giving rider. This donates the equivalent of a portion of the policy’s face value (usually 1 to 2 percent) to charity. In some cases, you can choose the charity; in other cases, the insurer donates to a charity of its choosing on your behalf. Importantly, that’s in addition to the payout that goes to your beneficiaries. In other words, the charity doesn’t get anything until you die, but then 1 or 2 percent is added on top of the policy face value you purchased and given to charity.
If you have a whole life insurance policy and designate a charity as the owner and beneficiary, it might be possible for you to deduct any further premiums you pay into the policy, since the policy would belong to the charity outright. (If you have a term life insurance policy, you can’t write premium payments off as a tax deduction, even if a charity is the sole beneficiary.)
Rules around tax deductions for life insurance can get complicated, so discuss your plans with your accountant to stay on the right side of the IRS.
Some charities accept tangible items as well as funds. For example, if you have historically significant heirlooms, you might leave it to a museum, preservation society or library. Another common item to donate is a car. Your estate would typically claim a tax deduction for the fair market value or the auction price of the car, depending on whether the charity sells the vehicle. One reason to do this is that your family wouldn’t have to deal with selling or disposing of an old car.
If possible, talk to the administrators or curators in advance to confirm that they are able to accept your donation. You can also schedule an appointment with a professional appraiser to check the value of heirlooms like antiques. Better to make arrangements now than leave family members guessing what to do when your preferred institution doesn’t have space for your intended gift.
Universities, nonprofits, health organizations and more may offer annuities for planned giving.
An annuity is a type of insurance contract where you pay now, in exchange for receiving regular payments later; many people use this as a form of “income” in their later years. Annuities offer tax-deferred growth and don’t have contribution limits like a 401(k) or IRA, making them a sound savings vehicle for some people’s retirement income. In other cases, an annuity’s fees and commissions might overshadow the advantages.
In the case of a charitable annuity, you’d donate money to the organization you support, and they’d take out an annuity on your behalf. You’ll get a percentage of that donation back every year based on your age (the older you are when you set up the annuity, the higher your disbursement percentage). When you pass away, the organization keeps the remaining balance.
If you’ve run the numbers and decided an annuity is a smart move for you, a charitable annuity can check off two boxes at once by benefiting a charity you support. “Some folks may prefer a charitable gift annuity because of income and consistency of payments,” says Rita Cheng, a Certified Financial Planner at Blue Ocean Global Wealth.
Annuities often make more sense once you’re getting closer to retirement age than when you’re in your 20s or 30s. But if you’re younger and thinking about how to include a charity in your estate planning, it’s worth keeping this option in mind for the future.
A donor-advised fund (DAF) is an account you can set up for charitable giving. This allows you to set aside charitable assets now (and get a tax deduction now) but make the final decisions on where the money should go later.
Here’s how it works: You contribute money, public securities like stocks, or other eligible gifts (like life insurance or real estate) into the DAF. Officially, a public charity “sponsoring organization” owns and manages it; they can invest the money and let it grow tax free.
From there, Oommen explains, you choose from charities the sponsor organization works with, and “make grant recommendations” (in other words, say how much you’d like to give from the DAF to a particular charity). Their list of “qualified charities” usually means pretty much any eligible 501(c)(3) organization.
You get to claim any eligible income tax deductions the same tax year you contribute to the DAF, even if you don’t select a receiving charity right away.
A DAF is worth looking into when you’re doing estate planning for a couple reasons:
In some cases, you might prefer to get a tax break for charitable giving now and decide on a recipient later—and you might decide you prefer to do it while you’re alive rather than upon your death.
According to Cheng, a DAF can be a more convenient, lower-cost alternative to establishing a foundation to carry out your charitable plans. You don’t need to be a millionaire; some organizations let you start with a minimum balance of $5,000.
A DAF can make it easier to donate anonymously than a direct donation, Cheng says, if privacy is important to you (for example, you don’t want your spouse getting lots of mail asking for more donations in your name after you’re gone).
A DAF can pass to a successor after you die, enabling your family to keep using those funds and making decisions about which charities they’d like to support. If you don’t want to ask a family member or friend to continue managing the DAF, Oommen says, “The donor may select their favorite nonprofits to receive outright distributions from the DAF after their death.”
Do note that the sponsor organization will charge an annual administration fee (typically around 0.6 percent of the account balance) and investment fees. Factor the advantage of tax-free investment growth against the cost of fees to see whether you’re better off with a DAF or giving directly to your chosen charities.
Here are a few of the emotional benefits of leaving money to charity:
Care for others. Part of your estate can provide food, shelter, medicine or other critical resources for people or animals in need.
Support a cause you believe in. Many arts institutions, environmental organizations and medical research charities rely on donations as an important source of funding.
Choose a beneficiary you feel connected to. If you don’t have close family, you might decide that it’d be more meaningful to leave money to an organization you care about, rather than a second cousin you barely know.
Leave a legacy for your name. Even if you have close family and friends, you might feel that leaving a gift with a broad reach is important to you. If you want your family to start a memorial scholarship fund in your name, for example, you might want to designate part of your estate for this purpose.
Your estate will be subject to estate taxes if it’s larger than a certain size. For most of the 2000s, estate tax limits were between $675,000 and $3.5 million, depending on the year. Effective 2020, the limit jumped to $11.58 million.
Realistically, this doesn’t apply to most of us. According to the New York Times, if you’re 65 or older, a net worth of $2 million puts you around the top 10 percent of households in that demographic. A net worth of $11 million is nearly the top 1 percent.
When the exclusion limit was lower, more households were affected by estate tax, so charitable giving had meaningful tax implications for many more people’s estates. If you expect your estate to be over the limit, you might work with a financial professional to structure charitable donations that would help reduce or eliminate your estate taxes.
If you’re thinking about taxes, ask a financial professional if it makes more sense to give while you’re still alive. In many cases, you might get a bigger tax advantage by claiming a tax deduction against your yearly income tax, rather than focusing on estate taxes.
At the end of the day, a will is a legal and financial document, but it can also serve as a form of personal expression. Leaving gifts for charity can benefit others and give you one more chance to take action for causes that are important to you.
Fabric exists to help young families master their money. Our articles abide by strict editorial standards. This article has been reviewed and approved by a compliance professional who is a licensed life insurance agent.
This article is designed to provide general information on the subjects covered. It is not, however, intended to provide specific tax or legal advice. Please note that Fabric and its representatives do not give tax or legal advice. You are encouraged to consult with your tax advisor or attorney concerning your own situation.
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