Sharpe Advisor Resources
Wills & Living Trusts
The following information and references to other resources may be beneficial to you and those who assist you in your estate and financial planning.
Begin With the Basics
The charitable bequest is widely known as a vehicle for property transfer and is the most common means of leaving assets to qualified charities at death. A will that includes one or more charitable recipients is basically no different from other wills. To be valid, the information it contains and the method in which it is executed must qualify under applicable state laws.
The proper name: Charitable entities may sometimes share the same or very similar names, and they may possibly be located in the same city or state.
When drafting a will that leaves property to a charitable entity, it is critical to correctly identify the intended recipient of the property. If in doubt, check with the organizations or institutions involved and request legal names and other identifying information. It may also be useful to include most recent known addresses.
The use of property: As in bequests to individuals, testators often choose to specify a particular use for their bequests. What is known as precatory language may be used to express a preference, or wishes may be stated in such a way that leaves flexibility for the recipient to determine use.
Most charitable bequests are left to the charitable entity “for the general purposes of the organization” a number of years before the funds are received, and the needs of the organization may change in many ways. Most donors choose to allow maximum flexibility for the use of the funds bequeathed.
If a donor wishes to restrict the use of a bequest, it is in the best interest of all involved to discuss the intended use with authorized representatives of the charitable recipient before the execution of the will.
Limits on the size of charitable bequests: Some states may impose limits on the amounts that can be left to charitable beneficiaries in certain situations. A spouse and/or children may be entitled to specific percentages of an estate that may override charitable dispositions. Such restrictions rarely impose barriers in the typical situation, but state laws should be examined if a donor is contemplating one or more charitable bequests that amount to a substantial portion of their estate.
Other than the considerations outlined above, there generally are no limits on the amount of property that can be left for charitable purposes through a will.
Choosing the Form of the Bequest
A charitable bequest may be structured in many ways. A person may choose to leave a specific dollar amount, particular real or personal property, a percentage of the estate or all or a portion of the residue of the estate following the satisfaction of other bequests or a combination of the above.
A fixed dollar bequest: In many cases, the person simply states a specific dollar amount. This is particularly useful in the case of a highly liquid estate that will be reviewed on a regular basis.
If a person is considering a larger bequest or if the estate will be composed primarily of relatively illiquid assets, it may be best to choose another method of satisfying charitable intentions.
A bequest of property: A donor may choose to leave a particular real property—whether a home, farm or rental property—to a charitable beneficiary. It may be left outright, or a life estate may be granted to a surviving spouse or other relative or friend.
Great care should be taken to properly describe the intended property and the interest bequeathed if it is not the entire ownership interest. In the case of tangible personal property such as jewelry, automobiles and other assets, all aspects should be carefully considered before making such assets the subject of a charitable disposition. Such gifts may create disputes and unnecessary friction among charitable and noncharitable heirs.
A specific bequest of intangible personal property such as stocks and bonds may not be the best choice. The value may have increased or decreased to a point where it no longer represents the intention of the testator.
In the case of any gift of property, language should be included that expresses the wishes of the testator if the property has been disposed of prior to death.
Bequest of the residue: Perhaps the most common method of leaving charitable bequests is through residuary clauses.
After providing for significant others and friends, many testators will specify all or a portion of the residue of their estate be distributed to one or more charitable organizations or institutions.
As a result, loved ones are cared for first, and charitable wishes then follow if this is the testator’s desire. Many people choose to leave a set percentage of the residue of their estate for specified charitable uses.
This approach offers a correcting mechanism in case the estate should unexpectedly increase or decrease in value.
An unlimited number of charitable gifts may be deducted from federal estate and gift taxes. See Internal Revenue Code section 2055(a). Check applicable state laws for restrictions that may apply.
The marital deduction: Some married people use trusts in their wills to take maximum advantage of the unlimited marital deduction. In the case of a life interest left to a spouse followed by a charitable disposition of the property, a combination of the charitable deduction and the marital deduction will effectively eliminate all tax at the federal level. See IRC sections 2523(a) and 2056(a).
Gift and estate taxes: The Tax Cuts and Jobs Act of 2017 continued the trend toward reducing the impact of federal estate and gift taxes on personal estate planning. The maximum federal estate and gift tax rate remains 40% for estate and/or gift taxes beyond the exemption amount. Effective January 1, 2018, the act doubled the estate and gift tax exemption amount to $10 million for individuals and $20 million for a married couple, adjusted for inflation since 2011. The exemption amounts for 2023 are $12.92 million for singles and $25.84 million for married couples. These amounts will continue to be indexed for inflation in future years. Check for latest amounts, legislative changes, extensions or applicable sunset provisions.
As in the past, unlimited amounts can still be transferred for qualified charitable purposes free of estate and gift taxes. The reduction of estate and gift taxes at the federal level on amounts left to family and other loved ones may now mean that more is available to make charitable gifts during lifetime and at death by those who are charitably inclined.
The federal gift tax was reunified with the estate tax by legislation enacted in 2011. The maximum amount that can be given to noncharitable recipients during life was increased in 2011 to the same amount exempt from estate tax (see above). The gift and estate tax exemption is also portable between spouses, meaning that a surviving spouse can elect to use any portion of the estate and gift tax exemption not used by the predeceasing spouse.
Additionally, annual lifetime gifts of $17,000 per year per donee are allowable and do not reduce the inflation-adjusted exemption from the federal estate tax.
Generation skipping transfer (GST) tax: This area of the law is quite complicated; however, charitable gifts may minimize the amount of transfer tax owed for some estates. It is one consideration to explore if the support of future generations is one of the person’s goals and if the estate would otherwise be affected by the generation skipping transfer tax. Under terms of federal tax legislation in 2017, the amount exempt from the GST tax was also increased to $12.92 million per individual for 2023.
Advantages of Living Trusts in Estate Plans
Over the years, many individuals have established revocable living trusts as part of their overall estate planning. The benefits of creating such a trust may be to:
- Bypass estate administration (probate), although estate administration is less costly and less time consuming in some states than in others.
- Preview a trustee’s performance.
- Shift investment decisions (while maintaining control).
- Provide a convenient way to manage assets in the event of incapacity.
- Obtain privacy in regard to one’s estate plan, although the trust agreement generally will have to be recorded and will then become a matter of public record if the trust contains real estate.
For the charitably motivated individual who sets up a revocable living trust, giving to a favorite nonprofit organization or institution through the trust can be a convenient way to provide for charitable interests.
Charitable Gifts From Living Trusts
Donations can be made from a revocable living trust during the settlor’s life or after death.
Gifts during the settlor’s life: If the settlor of a revocable living trust wishes to use assets held in the trust to make charitable gifts, a threshold question is whether the trustee is authorized to transfer the assets directly to charity.
The trust agreement may authorize the trustee in the trustee’s discretion to distribute trust assets to the settlor or apply trust assets for the settlor’s benefit. Or the trust agreement may provide that the settlor may direct the trustee to distribute trust assets to the settlor or apply trust assets for the settlor’s benefit.
In either of these situations, if it is not clear that the trustee has authority to transfer assets directly to charity, the best course of action may be for the trustee to distribute assets to the settlor and for the settlor then to make a personal gift to charity. This depends on how the revocable living trust instrument is drafted, even if the settlor is the trustee.
If it is clear that the trustee has authority to distribute assets to charity and the trustee makes such a distribution, the gift will be deemed to be made by the settlor for federal tax purposes, and the settlor, accordingly, should receive a receipt for the gift. Remember state laws govern the establishment of wills and trusts.
If the settlor is incapacitated, a question may arise as to whether an individual holding a general durable power of attorney from the settlor may direct the trustee to distribute assets to charity (or, for example, to use assets of the revocable living trust to create a charitable remainder trust). The answer to this question lies in the language of the revocable living trust agreement and in the language of the power of attorney. Often, the agreement prohibits the holder of the power of attorney from modifying or revoking the trust, which may block the trustee from following directions of the attorney-in-fact to make a charitable gift, absent express authority to follow such directions.
The Internal Revenue Service has ruled on a number of occasions that the holder of a general durable power of attorney has no authority to make gifts (typically, annual exclusion gifts to family members) out of assets to which the power pertains unless the power of attorney expressly authorizes the making of such gifts or applicable state law grants the holder of the power such authority.
Gifts made out of the revocable living trust at the settlor’s demise: Amounts left to charity from a revocable living trust at the settlor’s death normally qualify for the federal estate tax charitable deduction under IRC section 2055 because the amounts are included in the settlor’s gross estate and are considered to be transferred to charity by the settlor.
Generally, any gift arrangement that can be established by will can be arranged under the terms of a revocable living trust, although there are some fine points to be observed in dealing with revocable living trusts that are to distribute assets to a charitable remainder trust.
Distribution to a charitable remainder trust: If assets are left from a revocable living trust to a charitable remainder trust, the federal income tax regulations require that the assets be transferred from the living trust to the charitable remainder trust (i.e., from the trustee of the former to the trustee of the latter) so that the two trusts are separate and distinct. See Reg. section 1.664-1(a)(6), Example (4).
If the revocable living trust is to pay the settlor’s debts, federal estate tax and any state death taxes, it is important that the distribution to the charitable remainder trust be net of the debts and taxes so that none of the debts and taxes are paid by the charitable remainder trust. See Reg. section 1.664-1(a)(6), Example (3).
Although the charitable remainder trust may not be funded by the revocable living trust immediately upon the settlor’s death, the obligation of the charitable remainder trust to make payment of the annuity or unitrust amount should begin on the date of the settlor’s death. In this regard, see Reg. section 1.664-1(a)(6), Example (4)(i) and 1.664-1(a)(5).
The charitable remainder trust will be deemed created once it is partially or completely funded. This is significant because distributions made by the charitable remainder trust and any undistributed income of the charitable remainder trust will be governed for tax purposes by IRC section 664 (meaning, for example, that any undistributed income of the charitable remainder trust will bypass federal income taxation by reason of the trust’s exemption from federal income tax under IRC section 664(c)). Postmortem distributions by the living trust to the beneficiary(ies) of the charitable remainder trust are not governed by the special rules of section 664, but rather by the usual rules governing trust distributions. See Reg. section 1.664-1(a)(6), Example 4(ii). See section 664 for rules concerning maximum and minimum payout rates and charitable remainder values.
Income in Respect of a Decedent (IRD) items: If an individual plans to leave income in respect of a decedent to a revocable living trust at his or her death, it can make sense to use the IRD items to make charitable bequests. IRD left to an individual is generally subject to both federal income tax and federal estate tax. IRD left to charity, on the other hand, bypasses both income tax (because of the charity’s tax-exempt status) and estate tax for the charitable gift portion (because of the estate tax charitable deduction).
It is important, however, for the instrument creating the revocable living trust specifically to direct the IRD item(s) to charity in order to be assured that the trust does not pay income tax on the IRD. For details, see Income Tax Reg. 1.642(c)-3(b)(2) and the corresponding regulations.
Many of the same tax and drafting considerations come into play when planning a post-mortem charitable gift from a revocable living trust as they do when planning a charitable bequest. Much guidance regarding the tax issues can be found under the regulations explaining the IRC sections 642, 664 and 2055.
Recent developments: The tax code changes frequently. Always check for recent developments before the completion of estate plans. The IRS publishes helpful tax planning information and updates at www.irs.gov.
This information is solely educational, namely, to provide general gift, estate, financial planning and related information. It is not intended as legal, accounting or other professional advice, and you should not rely on it as such. For assistance in planning charitable gifts with tax and other implications, the services of appropriate and qualified advisors should be obtained. Consult an attorney for advice if your plans require revision of a will or other legal document. Consult a tax and/or accounting specialist for advice regarding tax- and accounting-related matters.