Navigating Charitable Bequests: Risks and Rewards for Early Planning

Charitable bequests are an essential aspect of philanthropic planning for high net worth individuals. When engaging in conversations with philanthropic clients, it is crucial to help them determine suitable assets for charitable giving. Not all assets are equally suitable for donation, and some can present challenges for charities. This article aims to provide insights into asset selection, considerations for charitable beneficiaries, and potential pitfalls to be aware of when making charitable bequests.

Choosing Suitable Assets for Charitable Giving

During discussions with clients, it is important to assess their asset mix and identify assets that are attractive for charitable giving. Low basis assets, which have built-in capital gains, are particularly beneficial for both the donor and the charity. By donating such assets, donors can claim a tax deduction while allowing charities to receive the proceeds without recognizing capital gains upon sale. Assets that are easily marketable and liquid, such as retirement accounts, are also favorable options for charitable giving.

Determining the Split Between Taxable Beneficiaries and Charity

The decision regarding the allocation of assets between taxable beneficiaries and charitable organizations depends on the client's preferences and overall estate planning goals. Some clients may choose to allocate assets equal to the federal estate tax exemption amount to family or friends, with any amount exceeding the federal estate tax exemption to charity. If possible, it is recommended to identify and vet specific assets for charity, considering the charity's willingness and ability to accept them. Alternatively, clients can provide trustees with the discretion and direction to determine the assets allocated to charity, offering greater flexibility.

Flexibility in Trustee Discretion and Communication

Granting trustees substantial latitude in asset selection for charitable purposes is advisable, especially considering the uncertainties surrounding future circumstances, such as federal estate tax exemption levels, political and economic climates, and asset values. Choosing trustworthy individuals or institutions as trustees and engaging in open discussions regarding the client's objectives can help ensure that the trustee's decisions and though process align with the donor's intentions. It is also beneficial to leave informal writings alongside estate planning documents to provide insights into the donor's thoughts and preferences.

Specific vs. Flexible Charitable Beneficiaries

Clients have the option to name specific charitable beneficiaries or grant the trustee the authority to choose the charities. Specificity is recommended when naming charities.  For instance, when naming specific charities, we recommend including accurate identifying information such as a charity’s tax identification number and verifying the correct name for the charity through resources like GuideStar or previously filed Form 990 Returns. That said, the donor may always leave the selection of charities to the trustee's discretion and direct that the trustee choose one or more charities which align with the donor’s lifetime philanthropic gifting.  Clients can maintain records of their lifetime charitable gifts, which would aid the trustee in identifying institutions that align with the donor's giving goals.

Establishing Private Foundations in Estate Planning

Private foundations can be set up either during a client's lifetime or as part of the testamentary estate planning process. Although there are advantages to establishing a foundation during life, it is possible to create one as part of the post-mortem administration. Careful consideration should be given to the legal and administrative requirements involved in establishing a private foundation, especially if it involves family members and potential self-dealing issues.

Addressing Challenges and Pitfalls

Several challenges and pitfalls should be considered when making charitable bequests. These include potential valuation discrepancies that can arise when specific conditions or restrictions are attached to charitable gifts. The appraisal process plays a crucial role in accurately valuing assets for both for estate tax purposes and charitable tax deductions. Additionally, when family businesses are involved, self-dealing issues and the possibility of unrelated business income tax (UBIT) should be carefully addressed. Illiquid assets and fractional interest gifts can also pose challenges for charities, necessitating backup plans and open communication with potential beneficiaries.