A number of firm clients are interested in charitable giving, whether made during lifetime or upon death. The reasons behind the differing approaches are varied.
One of the benefits of a lifetime gift to charity is the immediate income tax deduction that may be available.1 Unlike lifetime gifts to charity, deathtime gifts are not deductible for income tax purposes, although they may be deductible for estate tax purposes.2 The federal estate tax is applicable to taxable estates in excess of $12.06-million, and as a result, generally taxpayers will benefit more from a lifetime gift to charity than a deathtime transfer.
Despite the potential tax benefits available to taxpayers through life gifts, there is a reason why taxpayers might prefer to make a gift at death rather than during lifetime. During lifetime it is difficult for an individual to predict how much they will need to support themselves. For that reason alone, many clients opt to provide their charitable gifts after death.
Assuming the decision is made to provide for a charity on death, the next issue for consideration is whether to provide a fixed dollar amount or a percentage of the estate. A fixed dollar gift is generally more efficient because it is clear from the outset exactly how much the charity is to receive, and once paid, the charity’s interest in the estate terminates. By contrast, if a percentage of the estate is given to a charity, the amount due the charity cannot be determined until all assets are recovered, all debts, taxes and expenses are paid, and administration of the estate is largely complete. In addition, when a charity is provided a percentage of the estate, New Jersey law requires the Attorney General’s Office to be notified, and, as overseer of charitable organizations, the Attorney General will review the estate administration to protect the charitable interest.
Leaving a charity a specific amount or a percentage of the estate is not a question of right or wrong; either path is certainly viable. It is more a matter of the client’s wishes and the better approach given all of the circumstances. In some situations a client will spread percentages among charities and family, and in that way, ensure that everyone receives a portion of the estate. Another way to address the issue is to employ a hybrid formulation. For example, one might provide a charity “$50,000 or 10% of my estate, whichever is less [or greater].” This type of a provision is useful when the size of one’s estate at death is unpredictable.
Yet another approach that can be useful under certain circumstances is a layered approach, one that provides a specified amount to children, then provides a specific amount to charity, and then leaves the remainder of the estate to the children. This scenario is appropriate when an individual’s goal is to ensure the children are taken care of first with a designated amount, then the charity receives its gift after the children are paid their initial distributions, and finally any excess is paid to the children.
As should now be evident, there are a number of approaches to consider when making gifts to charity. Which approach to adopt depends upon individual client circumstances, and there is no “one size fits all” approach.
Once one has determined how best to provide for a charity, the final step is to be certain the charity is properly named and identified. Care needs to be taken because separate charities can have very similar names. In addition, charities can have national offices as well as local affiliates that are treated separately. While many national organizations and their local chapters have sharing arrangements, this is not always the case, and confusion and disputes can arise. Therefore, donors should be careful to properly identify the charity that is their intended beneficiary, particularly when the gift is embodied in a deathtime transfer and the donor is no longer available to provide clarification.
It is certainly true that a little extra attention at the outset can save substantial time and expense down the road.
1. The standard deduction in 2022, adjusted for inflation, for married couples is $25,900, up $800 from last year. Depending upon the other income tax deductions available to the taxpayer, charitable contributions may be fully or perhaps partially deductible.
2. Gifts at death to charity will be deductible to the extent the estate is subject to a federal estate tax. The federal estate tax exemption in 2022 is $12,060,000, and only taxable estates in excess of that amount will be subject to federal estate tax.