Special Considerations: Charitable Beneficiaries

Every estate and legacy plan is unique, and, quite frequently, there are special considerations that must be addressed and accounted for in one’s legal documents.

Perhaps the most commonly mismanaged consideration in a legacy plan is how to bless charities at death. It warms the heart to see so many faithful stewards including church, charity and ministry as beneficiaries of a percentage of their residuary estate. But what too many fail to examine is that carefully selecting the right assets for the right beneficiaries substantially boosts a legacy’s overall impact on family and charities.

When the rubber meets the road, there are three groups that await your assets at death: Family, Charity, and Uncle Sam. For those that want to leave a lasting, meaningful legacy to family, it is important to realize that, in most states and in most situations, you must choose at least two of the three groups to bless. Leaving your overall estate to family, alone, is a near impossibility. This conundrum centers on taxation at death. Even in states that do not impose an inheritance or estate tax, residents lose sizable sums of their wealth in the form of ordinary income tax at death. “How could this be,” you may ask, “when I’ve been paying income tax my whole life?” The answer lies in what has become the biggest asset for most working Americans: pre-tax retirement plans. These retirement nest eggs have yet to be taxed and, as such, are fully taxable at the ordinary income tax rates of your beneficiaries when you die. Recent changes to the tax laws have eliminated the ability for beneficiaries to “stretch” the tax burden over their lifetime, so the tax impact is greater than ever.

Enter church and charity. They, of course, pay no income tax. Unfortunately, the vast majority of those seeking to bless charity at death do so by simply adding them to their will. This does nothing to alleviate the income tax burden for one’s legacy plan. Remember, retirement plan assets are not bound by the terms of one’s will, because the retirement plan custodian is contractually bound to pay whomever the owner deems as beneficiary. After one’s spouse, the most common beneficiary designation is one’s child(ren). At death, those beneficiaries receive the assets, regardless of any intention to bless charity with a portion of one’s overall estate. Upon receipt, the full brunt of the income tax burden is realized, and Uncle Sam comes away with 25% or more of the nest egg.

This issue is a growing problem with a simple solution: give the right assets to the right beneficiaries. Before signing the “dotted line” on your new will to include your church or favorite charity, examine your pre-tax retirement assets and consider naming charity as a proportionate beneficiary on those assets that otherwise expose your family to the most tax attrition.