Charitable Bequests, Trusts, and Beneficiary Designations: Tax-Smart Ways to Build Giving Into Your Estate Plan
This is the second post in a short series on estate planning and legacy giving. The first post covers the values side of this conversation. This one covers the mechanics: the specific tools that let you build charitable giving into your estate plan in a way that is efficient for both your family and the causes you support.
A quick note before getting into it. I am a CPA and a CFP®, not an estate planning attorney. Everything below is the financial and tax strategy behind these tools. Actually drafting a will, trust, or beneficiary form should always go through your estate planning attorney, and I typically coordinate directly with that attorney so the legal documents reflect the strategy we build together.
The Most Overlooked Tool: Retirement Account Beneficiary Designations
This is the one I bring up most often because it is so easy to fix and so often missed. If you leave a traditional IRA or 401(k) to your children, they generally have to withdraw the full balance within 10 years and pay ordinary income tax on every withdrawal. If you leave that same account to your church or another qualified charity instead, the charity receives the full balance with no income tax owed at all, since charities are tax-exempt.
For families who want to give a meaningful amount to their church or favorite ministries through their estate, naming the charity, or a donor-advised fund, as the beneficiary of a retirement account is often more tax-efficient than leaving cash or other assets through a will. You can then leave other assets, such as a home or a taxable brokerage account, to your children instead, since those typically pass to heirs with more favorable tax treatment.
Charitable Bequests in a Will or Trust
A charitable bequest is simply a gift to a charity written into your will or trust, either a specific dollar amount, a percentage of the estate, or what remains after other gifts are made. This is the most straightforward option and works well for most families, though it does not carry the same tax advantage as a retirement account beneficiary designation, since assets passing to heirs from a will or trust are not generating ordinary income tax the way a retirement account withdrawal would.
Naming a Donor-Advised Fund as a Beneficiary
If you already have a donor-advised fund, you can name it as a beneficiary of your estate or your retirement account. The funds flow into the DAF, and your children, if named as successor advisors, can continue granting to your church and the ministries your family has supported for years. This is often the cleanest way to keep a family's giving pattern consistent across a generation, rather than making a single large gift at death with no further involvement from the family. I cover how this works for ongoing church and ministry giving in Donor Advised Funds for Christian Givers.
Charitable Remainder Trusts
A charitable remainder trust, or CRT, pays income to you or your named beneficiaries for a set period or for life, with whatever remains going to your church or another charity at the end of the term. This can make sense for a family that wants to support a cause significantly but also needs income from the assets during their lifetime, such as someone funding a CRT with a concentrated stock position or a business interest. CRTs are more complex to set up and maintain than the tools above, and they require close coordination between your estate planning attorney, your tax advisor, and the trustee.
Choosing What Fits Your Family
Most families do not need all of these tools. A simple beneficiary designation change naming your church or a donor-advised fund on a retirement account often accomplishes the goal with the least complexity. A charitable remainder trust makes sense for a smaller number of families with concentrated assets and an income need. The right combination depends on the size of the estate, the assets involved, and how much complexity a family is comfortable maintaining.
Frequently Asked Questions
Should I leave my IRA to my children or to my church? Retirement accounts left to children are generally subject to income tax as they are withdrawn. The same account left to a church or another qualified charity passes with no income tax owed, since charities are tax-exempt. Many families leave retirement accounts to charity and leave other assets, such as a home or brokerage account, to their children instead.
What is the most tax-efficient way to leave money to my church in my will? Naming your church or a donor-advised fund as the beneficiary of a retirement account is typically more tax-efficient than a cash bequest in a will, because the charity avoids the income tax that would otherwise apply to retirement account withdrawals.
Can I name a donor-advised fund as the beneficiary of my IRA or estate? Yes. This is a common approach for families who want their giving to continue after they are gone, particularly if children are named as successor advisors and can continue recommending grants to the church and ministries the family has supported.
What is a charitable remainder trust and how does it work? A charitable remainder trust pays income to you or your beneficiaries for a set period or for life, with the remaining assets going to a charity at the end of the term. It is often used by families with a concentrated asset, such as stock or a business interest, who want both income and a significant charitable outcome.
Do I need an estate planning attorney to set these up? Yes. Beneficiary designation changes can often be made directly with your account custodian, but trusts and any changes to a will require an estate planning attorney. Katherine Leonard, CPA, CFP®, helps build the financial and tax strategy and coordinates with your attorney on the legal drafting.
This article is for general informational purposes only and does not constitute investment, tax, or legal advice. Please consult your own financial, tax, and legal advisors regarding your specific situation.