Donor Resource | Charitable Giving and Your Estate Plan

*A contributed post from a friend of the Foundation, estate planning attorney Kevin O’Donnell of Schooley Law Firm, PC

Charitable giving is a great way to leave a lasting legacy on your local community. Donors often want to include charitable giving in their estate plans but are often unsure of the best way to achieve their charitable goals. Most donors typically want to make sure of two things. First, that their gifts are actually used for their intended purposes and, second, that the donor receives the maximum tax benefits for making the charitable gift. While not a complete discussion of charitable giving, below is a brief summary of some ways in which donors may make charitable gifts.

Gifts During Lifetime
Making an outright gift to charity during a donor’s lifetime is the simplest way to make a charitable gift. A donor simply picks his or her favorite charitable cause and writes a check to the charity for the desired amount. Donors who plan to give regularly, can even make monthly automatic transfers directly from their bank account to the charity. In addition to feeling good about contributing to their favorite causes, donors may report the gifts on their income tax returns and receive charitable deductions if they itemize deductions.

The rules for taking a charitable deduction are too complicated to discuss in detail here.  Donors should work with their tax advisers to ensure they comply with the Internal Revenue Service’s substantiation rules for all types of gifts, or risk being denied a charitable deduction on their income tax returns.

Donor Advised Fund
A donor advised fund (DAF) is another way to make a gift to charity. To create a DAF, the donor contributes a gift to a financial account under the control of a “sponsoring organization” in which the donor retains advisory privileges. Donors can make either one large gift, smaller continuing gifts, or a bequest to the DAF in their will or trust. The donor receives an immediate charitable deduction in the year of the gift (unless the gift is by bequest) and the money is held by the sponsoring organization which then invests the assets. The gift is irrevocable and the donor gives up all right, title, interest and control in the gifted property, but the donor may advise the sponsoring organization on how he or she would like to see the gift used.

A sponsoring organization generally charges administrative fees for managing the account and some have minimum requirements to set up a DAF. However, DAFs are advantageous because of their flexibility, because donors have a meaningful say in how their gifts are ultimately used, and for taxpayers that do not itemize deductions, DAFs can allow for one “bunched” gift that is deductible and sprinkled out in small doses to various charities over the year. If a donor wants to make a charitable gift but also wants to retain flexibility in the event their charitable goals change over time, a DAF is a great vehicle to use for charitable giving.

Private Foundation
A private foundation is another vehicle for making charitable gifts. Creating a private foundation involves the formation of a separate legal entity with its own tax identification number that must request tax-exempt status from the Internal Revenue Service. As a result, private foundations will typically require substantial legal and tax advice from a lawyer and/or an accountant and are typically used by donors making very large gifts ($5 million or more). However, the donor or donors who create a private foundation receive an immediate charitable deduction on their income tax return of up to 30% of adjusted gross income for cash gifts and are able to maintain complete control over giving during their lifetime and in perpetuity through family and board members (unlike a DAF or outright donation).

Specific Bequest in Will or Trust
Some donors choose to make charitable gifts at their death through a specific bequest in their will or trust. By giving at death, donors have the benefit of retaining control over their property until they no longer need it. However, because the gift does not actually occur until death, a donor does not receive a charitable deduction on an income tax return. Instead, the donor receives a charitable deduction on an estate tax return, if they are required to pay estate taxes. Fortunately, most Americans need not worry about filing an estate tax return because the estate tax currently applies only to individuals with more than 11 million dollars.

Despite the lack of a tax incentive, many donors still choose to leave a portion of their estate to charity. However, giving to charity through a specific bequest in a will or trust can be tricky without the proper advice. To avoid unintended results, a properly drafted estate plan is advised.

Some donors desire to be very specific about how they want their gift to be used. Overly specific language could lead to an administrative burden on the charity or in extreme cases create a dispute or litigation between the charities and the donor’s family members. Overly broad language, on the other hand, could result in the gift being used for purposes not intended by the donor. Donors should seek advice to ensure the language is specific enough to ensure the donor’s intent is achieved without causing administrative problems for the charity or litigation after the donor’s passing.

There is also the possibility that a chosen charity may no longer exist at the time of the donor’s death. Some donors have a loyalty to a particular cause rather than the particular charity designated in their estate plan. With the donor’s permission, the donor’s estate planning documents may grant their executor or trustee discretion to make the gift to a different charity supporting the same cause, if the charity designated in the will or trust is no longer in existence.  Other donors, however, may desire for their gift to go to one particular charity and no other and their estate plan should reflect that intent.

Giving to charity is a great way to leave a lasting impact on your local community. If you are thinking about making a charitable gift, do not hesitate to meet with your local community foundations (such as John Randolph Foundation), your tax advisors, and your estate planning attorney. Doing so will provide valuable resources and education to make sure your gift reaches its maximum impact on the local community, you receive maximum tax benefits, and you ensure your gift achieves your goals.

*This article is intended for general information purposes only and does not constitute legal or tax advice.  You should consult your attorney or qualified tax adviser regarding your situation.  This is part of a series of contributed articles from local estate planning professionals serving the Tri-Cities area of Virginia, and John Randolph Foundation does not endorse these professionals, nor do we receive any compensation or incentives for referrals.

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This post was written by AJ James