Charitable Planning: Basic Problems & Solutions

If you ask most charitable individuals if they want to leave money to charity at their death, most will answer yes. If you ask those same people how they have provided for this, most will admit that they've been meaning to change their will, but just haven't gotten around to it. Who has time to plan their dying when there is so much living to do?!

It is inconsistent that so many generous folks, who relished giving during their lifetime, leave nothing at their death to their favorite charities. Perhaps it can be assumed that they meant to make provisions but were not sure how. What follows are examples of problems that cause procrastination and solutions to those problems.

How Much Today? How Much Tomorrow?

Jane Smith, who has a modest amount of assets, is not comfortable leaving a set dollar amount to charity in her will. Sure, $7,000 might not seem like a big chunk of her money today, but what if it is all she has left at the time she dies? Does Jane really want to disinherit her children of the last morsel of her estate? On the other hand, what if her assets triple in size and now $7,000 is too small an amount?

A solution: Substitute a percentage (%) for the dollar ($) amount. If $7,000 is 5% of the estate at the time the will is drawn then maybe 5% should be the designated amount. That way, if the estate doubles, so does the 5%, and if the estate is halved due to expenditures, then the amount to charity is also halved.

At Least This Much... But Not Too Much!

What about the individual who accepts the percentage idea but also wants to ensure that their charity gets at least a minimum amount or no more than a maximum amount? The attorney could put in a "floor and ceiling" provision that states that "5% but no less than $3,000 and no more than $12,000" should pass to the charity. Now the estate can grow or shrink and the charity will be remembered.

Being Specific Can Cause Trouble

Planning to draft a will can be excruciatingly slow and painful for the individual who makes the mistake of being too detail-oriented. The will that leaves "this checking account to Bob, this stock to Judy, and the house to Tim" guarantees mayhem and requires constant review. Don't be too specific! Take a will drawn in 1984 that leaves the First Union Stock to the Church and the balance to the children. What if that stock is sold or if more is bought? What if it splits or becomes Wachovia through a merger? What did the decedent really want to happen? Don't leave your heirs asking tough questions; instead, will a percentage of your total estate to clearly named heirs without mention of specific assets. (This method would not preclude your heirs from choosing what particular asset they may want but they would have to work it out so that they each inherit the intended share that you specify.)

Taking Into Consideration...

Some individuals may choose to provide for charity via beneficiary designations. (See separate article: "Giving Via Beneficiary Designation".) It is extremely important to recognize that assets passing by joint tenancy or beneficiary designation do so per those terms outside of probate regardless of the terms of the will.

Although seemingly simple, designating assets to pass to charities outside of your will (outside of probate) can cause confusion. Your attorney might include language in your will stating something like this: "Taking into consideration the assets passing to charity by beneficiary designation (outside of probate), it is my intention that my charity receive no less than 10% of my total estate..." This way, you don't have to constantly revisit the terms of your will and beneficiary designations. In short, be sure to coordinate the disposition of your probate assets with the disposition of non-probate assets.

Pitfalls of Joint Ownership with Children

Many people put accounts in joint name with one of their children assuming that this will allow the child to: 1) easily access the accounts for bill paying, or, 2) avoid the trouble of probate at death. What many folks don't know is that because assets in a joint-with-right-of-survivorship account avoid probate, they may not be "counted" with the other assets when amounts are being tallied for distribution to the other heirs, including charities. (Also, depending on the amount of assets put into a joint account, there may be gift tax issues that need addressing at the time of funding.) A simple alternative to meeting objective "1" is giving the child signing authority on a checking account and/or a power-of-attorney. Objective "2" may be met by incorporating a living trust into your estate plan.

Sharing the Wealth but Controlling its Disposition -- The Charitable Trust

Some would like their assets to provide for certain individuals for some number of years and then pass to charities. If the assets are left outright to the individual there will be no assurance that the principal will not be spent or willed elsewhere upon that person's death. If the amount is substantial, a charitable trust might be a wise option. This trust could provide a set amount of income to an individual or group of individuals for a term of years or for a lifetime. At the end of the term the asset would pass to the charity designated. (Many charities offer gift annuities that could simplify this process.)

Who Pays the Taxes?

If you are fortunate enough to have an estate tax problem then this is an important question. Your estate will only have to pay the "death tax" if the amount of assets passing to individuals other than to a spouse or charity exceeds $1,000,000. (This is the current exemption amount though it is increasing in future years.)

The question of who pays the tax is an important one for charitable and non-charitable beneficiaries of your estate alike. For example, a person may, in their will, specifically devise their home to a child, leaving the "rest of the estate" to be split among named individuals and charities. Does the child who receives the home pay his or her share of the estate tax or is the tax to come out of the rest of the estate prior to division among the other individuals? On a large estate in which the death tax can take more than half of the value, this is an important question as it can have a significant impact on the net amount received by the individual heirs. Note that your heirs might be surprised to learn that the charity's portion, like a spouse's, cannot be reduced by estate taxes. Be aware of the net amounts everyone is likely to receive by asking your drafting attorney about "tax apportionment" issues.

Conclusion

While it may seem easy to draw your own will and beneficiary designations, even estates lacking the threat of taxation need a professional eye. Be willing to ask your prospective attorney what percentage of their time they devote to estate planning versus other areas of the law. Require expertise and do not begrudge paying for it. Your financial advisor(s) may also add value in the process, helping you determine, for example, how much you can afford to give away and still meet other objectives for yourself and your heirs. Finally, take advantage of your community foundation, The Foundation for the Carolinas. They have outstanding resources and offer excellent vehicles for meeting charitable objectives today or at death.