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Advisor's Quarterly Update


One of the most rewarding aspects of being an advisor is helping a client realize a long-desired goal. For some clients that goal may be making their final – and often largest – charitable gift as part of their estate plan. Clients usually require guidance for how to best make a testamentary charitable gift. Here are key factors to consider when guiding a client.

Family Dynamics

Many families are facing challenges of one type or another. Addictions, divorce, and debt are just a few of these challenges. While an outright inheritance may solve some of these issues, providing a stable source of income may be a better solution for an heir. The advisor who can educate a client about testamentary charitable giving options that pay income such as charitable remainder trusts or gift annuities is providing a valuable professional service that will enable the client to achieve their goals for both family and charity.

Tax Consequences

While some high net-worth clients include charitable gifts in their estate plans to minimize taxes, even charitably inclined clients with modest assets can have their estate impacted by taxes. For example, retirement accounts such as an IRA, 401(k), and 403(b) can impose a substantial income tax burden on the family members who inherit those accounts. These assets are subject to Income in Respect of a Decedent (IRD), assets on which income taxes would have been due if the decedent had lived and become due when the assets are accessed by the individual named as the beneficiary of the account.

Charities, however, do not pay income taxes making retirement accounts a much better asset to use for testamentary charitable giving. Guiding a client in selecting tax-efficient assets to leave to charity can result in maximizing the estate assets available to heirs.

Additionally, there is a key change to IRAs under the SECURE Act passed in late 2019. Previously, non-spousal beneficiaries on an IRA account could “stretch” the required IRA withdrawals over their lifetimes. Young family members were able to initially take small distributions which allowed the accounts to grow over many decades. The SECURE Act requires non-spousal beneficiaries complete the withdrawals in 10 years.

To help with this change, many financial planners recommend using a special charitable vehicle, usually either a charitable remainder trust or a charitable gift annuity, to provide a lifetime income to the non-spouse beneficiary. The charitable vehicle chosen can be funded with the IRA account proceeds at death, providing a lifetime income to the beneficiary, and upon the beneficiary’s death, the remaining funds are distributed to the charity the original IRA account holder designated during life.

Titling of Assets

Supposedly well-planned estates have been known to unravel due to the incorrect titling of assets. The Will, while necessary, often plays only a supporting role in the distribution of estate assets. It is common to find that most of a client’s assets are in retirement accounts, or jointly owned, or are held in a living trust. The Will does not control the distribution of such assets. Reviewing all documents that will impact the distribution of the client’s estate is crucial to ensuring that all of the client’s objectives, charitable and otherwise, will be accomplished.

Communicating with the Charity

It is advisable to contact the charity before the estate plan is finalized to confirm that we will be able to fulfill your client’s wishes. Will the gift be supporting a priority of the charity? Does the program still exist? Clients will want to know that their estate gift will be useful in helping the charity to carry out its mission.

Assisting a client in structuring a testamentary charitable gift can bring great joy to a client and satisfaction to the advisor. And that’s good karma for the client – and the advisor!