Don’t Miss Your Biggest Giving Opportunity

Don’t Miss Your Biggest Giving Opportunity

At Sound Stewardship, we’re honored to serve a very generous clientele. Most of the families we help have causes they love to support on a regular basis. Yet even among our clients, many have forgotten what’s often their biggest giving opportunity: a gift after death.

It may not be fun to dwell on, but if you think about it, leaving money to charity in your will has potential to be the largest gift you’ll ever give. And after all, you no longer need the money (a concern for those facing future long-term care expenses). Since transfers include all proceeds from home sales, life insurance, and retirement accounts, the dollar size of bequest gifts are typically larger than those made during life.

The hardest part: deciding how much to leave to charity

When I tell people that many of our clients like to leave money to charity in their estate plan, and ask if there are any causes they’re passionate about, the answer is almost always yes. Deciding whether or not to include charities is easy. Deciding how much seems to be the part where people get tripped up.

The first idea that’s usually offered up is 10% of assets. While this is a good starting place, I’d suggest you consider another concept that resonates with many of my charitable clients.

Consider adding “a child called charity”

Here’s the idea: consider adding a share in your estate plan that is equal to the other number of heirs you already list. For instance, if you have 3 children that are splitting your assets at your death, think about adding a fourth “child” as the charity. The estate would then be split 4 ways instead of 3.

This strategy – “a child called charity” – works for many people because, at their death, it increases the amount available for charities. At the same time, adding another recipient to the plan does not usually reduce the other heirs’ share too much to become problematic.

Example: Tony and Mary have three adult children and assets totalling $1 million. If they both died today, their estate would look like this:

Home equity $250,000
Life insurance proceeds $250,000
Retirement accounts $500,000
Total estate value $1,000,000

 

Their original estate plan listed their 3 children as equal beneficiaries of the estate, but their revised plan looks like this:

Before

Adult Child 1 33%
Adult Child 2 33%
Adult Child 3 33%

 

After “a child called charity”

Adult Child 1 25%
Adult Child 2 25%
Adult Child 3 25%
Charities 25%

Every family is unique

Of course, not every family or estate plan is quite this simple. For families with larger estates, one “child called charity” may not be enough. Others may have a loved one with special needs that will require more money to aid their well-being. In certain cases, previous marriages or children from different spouses may complicate matters.

For better or worse, many families default to an automatic “equal-share” way of thinking about estate plans. Few individuals, even those with very large estates, actually stop to consider how the inheritance will affect their heirs. I encourage every family to ask this question when wondering how much leave their children:

What impact do you think this money will have on your child’s life?

I suggest families think about their estate transfer using the amount their assets are currently worth. It’s too difficult to guess what your home’s value might be in 20 years, or what your investments will be worth when you’re 100 years old. These types of scenarios will usually get you stuck. A good estate plan considers contingencies, but is built for what would happen if you died today.

How to practically add charities

If you decide you’d like to add “a child called charity”, you need to update your estate plan. Ideally, most estate plans should name charitable recipients through a Donor Advised Fund. This type of account can be set up at a foundation of your choice, and would become your family’s “giving account.” The succession plan (instructions for how to give the balance away when you die) is very easy to update. This means that if you later change which charities you want to receive assets, you do not have to re-write any legal documents. You simply update the instructions on your fund.

Not all inheritance assets are equally optimal for charitable giving. For instance, in today’s tax environment, it is better for the charity’s portion to come out of any pre-tax accounts (like an IRA). These assets go tax-free at your death to the nonprofit, whereas your heirs are usually taxed on distributions.

Your financial planner, in coordination with your estate planning attorney, can help you design the plan that suits your family best. If you don’t have a financial planner yet, we’d love to come alongside you and help figure out these questions together!

Read more from the Sound Stewardship team on generosity:

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