Many individuals have charitable intent that they would like to incorporate into their estate plans, but aren’t quite sure how to accomplish that. Today I’m going to outline four main methods of including charities in your estate plan.
Outright Bequests to the Charities
Outright bequests to the charities are the simplest and most straightforward of these avenues. Here you designate what charities receive how much from your estate. If you want the money to be slated for a certain activity within that charity (e.g. your favorite university for the purpose of providing scholarships), you could so designate in your will or trust.
Here, you are relying on the charities to abide by your wishes. They can consume the principal for the stated purposes, or if there is no stated purpose then for their general cause.
The next avenue would be a public foundation, such as The Southwest Florida Community Foundation (SWFCF), United Way or a host of other foundations that serve to achieve charitable objectives.
Here, you would name the public foundation in your trust, and describe the charitable causes that you would like for your bequest to satisfy. The public foundation typically invests your money pooled with their other funds, and the proportionate amount of income generated by your fund would be distributed annually to the charitable causes you set forth.
Because it is a public foundation, meaning that a majority of its assets and revenues are not from one or just a few individuals, the more liberal tax laws governing public foundations apply. So long as your bequests and directions meet the Internal Revenue Code standards and are consistent with the bylaws and governing documents of the public foundation, almost all of the monies you slated for your charitable causes will benefit those causes annually following your demise.
The public foundation does have administrative expenses that are satisfied from its general pooled income. You can speak to them about how much of your money will one day satisfy your charitable intent and how much might be expected to cover the public foundation’s overhead.
A third avenue to achieve your charitable goals is to build a private foundation inside of your estate plan. The private foundation would work very similarly to a public foundation mentioned above, but must comply with a plethora of IRS rules and regulations. The IRS doesn’t pass out tax exemption certificates
without imposing a lot of rules. Since private foundations are, by definition, usually limited to one family, the IRS is worried that the private foundation will be a front to achieve charitable deductions without actually benefitting charity.
Therefore, the drafting of such a foundation is a detail oriented exercise. Upon your passing, the foundation is typically established by the trustee of your trust, and must distribute a minimum of 5% of the trust value annually for the foundation’s charitable purposes. Moreover, a 2% excise tax on net investment income is levied, although there are exceptions to that rule which is beyond the scope of this discussion.
Salaries that your trustee(s) take are highly scrutinized (since they are not a charitable function) and are limited under IRS rules. Annual tax returns (Form 990PF) disclosing not only the income but the activities of the foundation are required.
The benefit of a private foundation is that those who you select to run it will ultimately ensure that your charitable wishes are carried out the way that you want them carried out. Further, aside from the excise tax and administrative expenses, your charitable bequests will be used to meet your charitable purposes.
Charitable Remainder Trust
The last method I will discuss here is the Charitable Remainder Trust (CRT). Here you name a trustee that will manage the investments and make the distributions. Typically, you name a family member or other person to receive an annual income distribution, which is either calculated as a fixed annuity based upon a percentage of the original contribution to the trust, or a unitrust percentage which is a fixed percentage recalculated annually based upon the principal balance of the trust.
Here, the non-charitable recipient receives the income interest either for a term of years or for their lifetime. Upon their passing the charities named in the trust receive the balance.
There are other methods besides these, such as charitable lead trusts and gift annuities. Discussing the specifics of your charitable intent and how that matches the various attributes of each method can help lead you to the best fit for you and your family.
© 2020 Craig R. Hersch. Originally published in the Sanibel Island Sun.