What Is a Legacy Gift and How Do They Work?

A legacy gift is a charitable donation arranged during a donor’s lifetime but fulfilled after their passing. These gifts are typically facilitated through estate planning documents like a will or trust, becoming effective upon the donor’s death. This allows individuals to support causes they care about, extending their philanthropic impact beyond their lifetime.

Types of Legacy Gifts

Legacy gifts can be structured in several ways, each offering distinct methods for transferring assets to a charitable organization. One common approach involves bequests made through a will. These include specific bequests, which designate a particular asset or a fixed dollar amount, such as “$10,000 to Charity X,” or a specific non-monetary item like a piece of art.

General bequests involve gifts from the estate’s general assets, while a percentage bequest designates a specific portion of the overall estate. A residuary bequest leaves the remaining balance of an estate to a charity after all debts, expenses, and other specific bequests have been satisfied. Contingent bequests are conditional, taking effect only if certain circumstances are met, such as if a primary beneficiary does not survive the donor.

Another method involves designating a charity as a beneficiary on various financial accounts. This can apply to retirement accounts, such as Individual Retirement Accounts (IRAs) or 401(k)s, and life insurance policies. These designations enable assets to be transferred directly to the named charitable organization upon the donor’s death, often bypassing the probate process.

Charitable trusts provide another structured way to make legacy gifts. A Charitable Remainder Trust (CRT) is an irrevocable trust where a donor transfers assets, and the trust then pays an income stream to the donor or other non-charitable beneficiaries for a specified term or their lifetime. After this period, the remaining assets in the trust are distributed to the designated charitable organization.

Conversely, a Charitable Lead Trust (CLT) involves an irrevocable transfer of assets where the trust makes payments to a charitable organization for a set period. Once this period concludes, the remaining trust assets are then distributed to non-charitable beneficiaries, often family members. Both CRTs and CLTs require careful planning.

Other planned giving options include gifts of real estate with a retained life estate. In this arrangement, a donor irrevocably deeds property, such as a primary residence or vacation home, to a charity but retains the right to live in or use the property for their lifetime or a specified term. The charitable organization receives full ownership and possession of the property only after the donor’s death or the end of the specified term.

Realizing a Legacy Gift

The process of a charitable organization receiving a legacy gift varies depending on how the gift was structured. For gifts made through a will, the estate undergoes a legal process known as probate. During probate, the will is validated, the deceased’s assets are inventoried, debts and taxes are settled, and then remaining assets are distributed according to the will’s instructions.

The executor of the estate, named in the will, is responsible for managing this process, including identifying named charities and ensuring the bequests comply with legal requirements. If the estate includes non-liquid assets, such as real estate or certain investments, these may need to be sold during probate to fulfill the charitable gift. Probate can involve expenses and delays before the gift is received.

In contrast, gifts made through beneficiary designations, such as those on retirement accounts or life insurance policies, generally bypass the probate process. These assets are transferred directly to the named charitable beneficiary upon notification of the donor’s death and completion of the necessary paperwork with the account administrator. This direct transfer offers a more expedited way for charities to receive funds.

For gifts established through charitable trusts, the administration of the trust dictates the distribution of assets. The trustee, as outlined in the trust document, manages the assets and makes payments to the specified beneficiaries according to the trust’s terms. Once the trust term concludes, the remaining assets are distributed to the charitable organization.

Upon receiving a legacy gift, the charitable organization acknowledges the contribution and ensures it is used as intended. This involves proper record-keeping and directing funds toward specific programs as outlined by the donor. Clear communication and detailed gift specifications enhance the charity’s ability to plan for future use of funds.

Key Considerations for Donors

When planning a legacy gift, donors should ensure their intentions are clearly documented. Using precise language in legal documents, such as wills or trust agreements, helps ensure the gift is directed to the correct charity and applied to its intended purpose. Ambiguity can lead to misunderstandings or delays.

Consulting with qualified professionals is a key step in the planning process. Working with an estate planning attorney can help ensure that all legal documents are properly drafted and aligned with the estate plan. A financial advisor can help integrate charitable giving with broader financial goals.

Donors may consider informing the charitable organization about their planned legacy gift. Communicating these intentions allows the organization to understand the donor’s philanthropic vision and plan for the anticipated gift’s use. This communication helps ensure the gift is utilized as intended.

Regularly reviewing and updating estate planning documents is advisable. Life circumstances, financial situations, and even the details of charitable organizations can change over time. Periodic reviews help ensure that the legacy gift accurately reflects current wishes and remains effective.