What Is a Charitable Bequest and How Does It Work?

A charitable bequest is a way to extend philanthropic efforts beyond one’s lifetime. It involves designating assets to a qualified charitable organization through a will or other estate planning documents. This gift takes effect upon the donor’s passing, supporting causes important to them. Integrating charitable intentions into an estate plan helps ensure values continue to make a difference and contribute to non-profit operations.

Defining Charitable Bequests

A charitable bequest is a gift to a charity that becomes effective after the donor’s death, formalized within their estate plan. Unlike a lifetime gift, assets remain under the donor’s control during their life. Bequests can be structured in several forms.

A specific bequest involves leaving a fixed amount of money or a clearly identified piece of property, such as $25,000, a piece of art, or real estate. A pecuniary bequest is a specific bequest referring to a fixed sum of money.

A residuary bequest allocates all or a percentage of the estate remaining after other specific bequests, debts, and taxes are satisfied. This offers flexibility, as the gift adjusts proportionally if the estate’s value changes. A contingent bequest is conditional; it takes effect only if certain events occur, such as a primary beneficiary predeceasing the donor. This acts as a backup plan, directing assets to charity if the initial distribution plan cannot be fulfilled.

Mechanisms for Making a Bequest

Charitable bequests are established through legal instruments. One common method is a last will and testament, where a bequest is included as a specific clause. This clause details the charity, assets, or amount. To ensure the gift reaches the intended organization, use the charity’s full legal name and, if possible, its Employer Identification Number (EIN).

Another mechanism involves a living trust, which can be revocable or irrevocable. A living trust allows assets to be distributed outside of probate upon the grantor’s death, offering more privacy and a quicker distribution. The trust document specifies the charitable beneficiary and gift terms.

Assets like retirement accounts (IRAs and 401(k)s) and life insurance policies offer a distinct way through beneficiary designations. Naming a charity directly as a beneficiary on these accounts bypasses the will or trust, transferring assets directly upon death. This method streamlines the transfer process and offers tax efficiencies.

Tax Implications of Charitable Bequests

Charitable bequests offer tax advantages for an estate. Gifts to qualified 501(c)(3) organizations are 100% deductible from the gross estate for federal estate tax purposes, with no limitation. This unlimited deduction can reduce or eliminate federal estate tax liability, especially for larger estates.

Income in respect of a decedent (IRD) refers to income a person was entitled to receive but did not before death, such as from IRAs or 401(k)s. If these assets go to individual beneficiaries, they may face income tax upon withdrawal, creating a “double tax” scenario. However, when IRD assets are left directly to a tax-exempt charity, the organization avoids income tax on the distribution. This makes charitable bequests of retirement accounts a tax-efficient strategy.

While federal estate tax deductions are unlimited for qualified charitable gifts, consider state-specific taxes. Many states offer charitable deductions for inheritance or estate taxes. State laws differ and can influence the overall tax efficiency of a charitable bequest.

Practical Considerations for Donors

Planning a charitable bequest ensures it aligns with a donor’s intentions. Select a qualified charity by researching its 501(c)(3) tax-exempt status, mission, and financial health. Resources like Charity Navigator can help assess an organization’s transparency and effectiveness. Identify the charity by its full legal name and address.

Choosing specific assets affects the gift’s tax efficiency. Appreciated securities, such as stocks or bonds held over a year, and retirement accounts like IRAs, are advantageous for charitable giving. Donating appreciated assets directly to charity avoids capital gains taxes. Gifting retirement accounts to charity prevents income tax on those funds, which would apply to individual beneficiaries.

Communicate the planned bequest to the chosen charity, especially for significant gifts. Informing the organization helps them understand future support and plan for fund use. This communication can also help structure the gift to achieve philanthropic goals.

Seeking professional advice is recommended to integrate a charitable bequest into an estate plan. An estate planning attorney can draft or amend wills and trusts to reflect wishes. A financial advisor can guide selecting tax-efficient assets for the bequest.