Not all gifts are created equal, especially charitable gifts.
That’s why legacy planning can be a powerful part of your Estate Planning.
You can leverage the benefits of your gifts, enhancing the financial security of yourself and your heirs while being philanthropic.
Estate planners often refer to these strategies as planned gifts or planned giving.
Often, gifts take effect only under your will or living trust. Other strategies can be set up during your lifetime to generate the trifecta of current income tax benefits for you, income for you or your loved ones and gifts to charity.
When you’d like to leave a legacy for one or more charities as part of your estate, review these strategies to determine the best moves for you.
A bequest is a gift made through your will or living trust that takes effect after you pass. You hold and control the assets during your lifetime.
There are several ways to make outright bequests, and the route you choose can make a big difference to the charity and your other beneficiaries.
You can make a specific bequest. A specific bequest can be either a stated dollar amount or a particular piece of property.
For example, your will could state that you leave $50,000 to a particular charity or to each of several named charities.
You also could leave a certain number of shares of a stock or mutual fund, or a parcel of real estate.
The specific bequest could be shared equally by several charities. It is simple and straightforward, and probably the most common way to make posthumous gift.
You need to think carefully about specific bequests, because there are a few risks.
Suppose that at today’s values, the charity is slated to receive about 10% of your estate. There could be a major market decline or other event that reduces the value of your estate.
Because your will provides a specific dollar bequest, the charity then receives a higher percentage, perhaps 20% of the estate.
Your heirs will receive less than you planned, and it could be significantly less.
Or the specific property you leave the charity could decline while the rest of your estate appreciates, leaving the charity with far less than you intended.
The point is — when you make a specific bequest of particular property, the value of that property and its share of the estate can fluctuate.
The results could be very different from what you intended.
The residuary is the part of your estate that’s left after the specific bequests have been filled.
For example, you could leave specific bequests to your spouse and children and perhaps to others. The wealth that’s left is the residuary.
It could be there is little or no residuary after the specific bequests and the cost of administering the estate are deducted.
The residuary bequest can be of the full residuary or a percentage of it.
Suppose you have a $5 million estate. You decide you want a minimum of $4 million to pass to your family. Only after that bequest is satisfied will charity receive anything.
One option is to decide your loved ones should receive only $4 million, and charity receives all of the residuary estate.
Another option is to leave only a portion of the residuary estate to charity. Your will might say that after the $4 million of specific bequests are satisfied, charity will receive 50% of the residuary estate, and the rest of the residuary estate will go to your family.
Some people put another safeguard in their plans. They provide charity will receive gifts only if the estate is worth at least a minimum amount.
Another safeguard is to provide that charitable gifts are capped at a percentage of the estate regardless of the other terms of the will.
These safeguards ensure there will be a minimum inheritance for your loved ones and prevent you from having to update the plan each time asset values change.
It’s important to consider all available strategies before deciding to make specific bequests. We’ll cover more of these strategies in next week’s edition.
You can check out Part 2 of this post here.