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Charitable bequests are one of the most tax-efficient ways to leave assets to the causes you believe in and hope to fund. By designating a charity as a beneficiary of your IRA or estate, you can grow your giving and potentially reduce your heirs’ estate tax bill to the Federal or State government.
However, as helpful as these strategies may be, real-world implementation can often create unexpected complications. Understanding both the benefits and the potential pitfalls of a bequest is essential so that your intentions are carried out smoothly.
Note! We’re not estate lawyers, but we sure love to collaborate with them. These are some of the administration concerns we center when we’re implementing a client’s estate plan!
What TO know:
A charitable bequest may allow you to leave assets to a nonprofit as part of your estate plan.
Traditional IRAs (tax-deferred) are often one of the most tax-efficient assets to give to charity.
Administrative challenges can delay or complicate Traditional IRA distributions.
Strategies like testamentary (only created at your death) donor-advised funds (DAFs) can simplify execution.
Proper planning helps support your charitable legacy so that it can be fulfilled as you intended.
What is a Charitable Bequest?
A charitable bequest is a planned gift made through your estate, usually defined in a will, trust, or beneficiary designation. It allows individuals to transfer assets, such as cash, securities, or retirement accounts, to a nonprofit organization upon their death.
A bequest can also potentially reduce the tax burden on your heirs, if you have a taxable estate.
Unlike charitable donations, bequests take effect after death, making them a powerful tool for tax and philanthropic planning.
Common Types of Charitable Bequests
There are common types of bequests used in estate planning. Each type offers variable flexibility depending on your personal goals and estate structure.
Specific Bequest: A gift of a designated asset or specific dollar amount (we prefer percentage, see below).
Percentage Bequest: A gift of a certain percentage of the total estate rather than a fixed amount. (This is Modernist’s preference for easy inflation adjustment to your gift over the years and easeful calculations at death.)
Residuary Bequest: A gift of all or a percentage of estate assets remaining after specific bequests have been fulfilled and debts paid.
Contingent Bequest: A gift that takes effect only if certain conditions are met, such as the primary beneficiaries predecease you. (Jane Austen’s novels are rife with these!)
Demonstrative Bequest: A gift that comes from a specific funding source.
Benefits of Charitable Bequests
Charitable bequests to 501c3 organizations provide both personal and financial advantages. Charitable bequests offer a combination of tax efficiency, flexibility, and long-term impact that makes them a valuable component of many estate plans.
Tax Efficiency: Certain assets, such as traditional IRAs, can be significantly more effective when left to charity rather than taxable heirs (why? see below).
Maximized Impact: Because charities don’t pay tax, they typically receive the full value of the gift, allowing more of your wealth to support the causes you care about.
Flexibility: Bequests can be structured in multiple ways and updated as your circumstances evolve.
Legacy Planning: Align your wealth with your values and create a lasting charitable impact.
Why Tax‑Deferred Accounts Are Often the Best Assets to Leave for Charity
IRAs, 401(k)s, 403(b)s, and other tax‑deferred retirement accounts are often some of the most effective assets to leave to charity. If individuals inherit these accounts, distributions are taxed as ordinary income. Under the SECURE Act of 2019, most non‑spouse beneficiaries must fully distribute inherited traditional retirement accounts within 10 years of the original owner’s death. This change eliminated the stretch IRA, which previously allowed heirs to spread taxable distributions over their lifetime.
As a result, heirs may be forced to recognize significant taxable income over a compressed ten year time frame. Charitable organizations, by contrast, can receive distributions from these accounts income‑tax free, allowing the full value of the asset to support philanthropic goals.
Potential Pitfalls of an IRA Charitable Bequest
Let’s say a philanthropically minded personthoughtfully designated several charities as beneficiaries of her IRA, a strategy that is generally tax-efficient and well-intended. However, the administrative burden of transferring the assets ended up being more than the charities were prepared to take on.
Why? Well, most custodians that hold investment assets require account beneficiaries to open an inherited IRA to receive their assets. While this is routine for individual heirs, it can create complications for charities. In this case, the actual employees at the designated charities were understandably hesitant to provide their personal information and open accounts at the same custodian. After months of back-and-forth, the estate administration was transitioned to the custodian’s retail team, which was an outcome no one wanted.
This highlights a critical gap between charitable intentions and practical implementation that financial planners and donors need to bridge.
Fortunately, several strategies exist that can help make your charitable giving successful while minimizing administrative headaches.
Option 1: Testamentary Donor-Advised Fund
One powerful solution to the administrative challenges described above is to create a testamentary DAF at your local Community Foundation. A testamentary DAF eliminates the need for charities to establish inherited IRAs, simplifying the distribution process considerably.
This vehicle is established during your lifetime but remains unfunded until your death.
Create your DAF at a Community Foundation (more on where to open it in FAQs below).
Name the DAF as either a primary or contingent beneficiary of your IRA or other accounts, creating a streamlined funding path for your charitable intentions.
To manage the DAF’s distributions after your death:
Appoint a successor with the Community Foundation who can direct funds to charities after your passing.
Specify your specific charities
Work with your Community Foundation advisor to attach a letter for your DAF explaining your intent. Something like:“The Believe in Plenty Donor Advised Fund is meant to benefit racial justice efforts in the arts and education. Please choose the grassroots and national organizations making an impact in this work at the time of my death. Please distribute all of these assets within 1-3 years of my death.”
option 2: create a Dedicated Charitable IRA account
Another effective approach to charitable giving through an IRA is to divide your IRA into separate accounts, reserving one exclusively for charitable beneficiaries. This strategy simplifies estate planning by creating a dedicated charitable IRA distinct from the portion intended for family members. Naming a testamentary DAF as the beneficiary of the charitable IRA assists support a smooth transfer of assets while preserving flexibility.
Final Thoughts on Charitable Bequests
Charitable bequests focus specifically on honoring your legacy after death. They are a powerful way to create meaningful impact while optimizing tax efficiency.
Thoughtful planning must involve not only strategy, but also execution. When considering what assets to leave to charity, ask your financial advisor to collaborate with your estate planning attorney to implement these strategies and help ensure that you your charitable legacy is implemented smoothly.
FAQs about Charitable Bequests
1. Where to open your DAF?
Open your DAF at a community foundation. We do NOT recommend a custodian like Schwab or Fidelity. Custodian DAFs are a warehousing wealth disaster, learn more here: Stop Warehousing Wealth in Charity Funds.
We love community foundations, and especially social justice community foundations for creating your DAF. For example, our fearless leader and Senior Planner, Georgia has a testamentary DAF at OCF as well as an active Donor in Movement Fund at Seeding Justice that receives 1% of our gross revenue.
Review the steps to opening a DAF at Greater Houston Community Foundation: How to Set Up a Donor Advised Fund.
Check out this directory of national and regional funds at Resource Generation .Social Justice Community Foundations, Rapid Response Funds, and Intermediaries
2 . What is the difference between a bequest and a donation?
A bequest is a gift given through your will or estate after your death, while a donation is a charitable contribution typically made during your lifetime.
3. How does the SECURE Act affect inherited IRAs?
The SECURE Act requires most non-spouse beneficiaries to withdraw inherited IRA balances within 10 years of the original owner’s death, significantly accelerating tax consequences. Charitable beneficiaries are exempt from these rules and receive distributions tax-free.
4. Are charitable bequests tax-deductible?
Charitable bequests to 501c3s are generally deductible for estate tax purposes, which may reduce the overall taxable value of an estate. However, they do not provide an income tax deduction during your lifetime.
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