“Before you do anything, I would recommend consulting a good accountant who understands tax and estate planning, and also to make sure you have a lawyer who can help you carry out your plan,” says Laredo, principal of Laredo Law.
She says the interaction between the deceased’s personal income tax return and the recently introduced Graduated Rate Estate rules, which apply to designated estates within 36 months of a person’s death, can affect the efficiency of a charitable donation.
“If the donation is made within 36 months, the credit is claimed in the return for the year of death or that of the immediately preceding year at the graduated rate,” she says. “Alternatively, it can be claimed by the estate in the year of donation, or carried forward for up to five years. If the estate claims the credit, then it’s the estate tax that is reduced and not the deceased’s personal taxes.”
Working out which version is best requires professional help, Laredo says.
“Estates are subject to different tax rules, so to find out the most effective way of making a donation, you need to talk to both an accountant and a lawyer,” she adds.
But long before working on those specific details, Laredo says her first task when a client comes to her is to find out exactly why they intend to write a charity into their will.
Leaving cash or property to a charity is often a default option for people who don’t realize they could be better served by other estate planning strategies, she says.
“If the goal is to relieve your tax burden, there are other tools you can use besides giving to charities. It’s also possible that you may be better off donating when you’re still alive, as that can significantly reduce the amount of tax you owe,” Laredo explains.
Donor-advised funds or other types of private foundations are another option for those who wish to leave a legacy after their passing, she points out.
“It all depends on what your aims are,” Laredo says.
Testators should also let other beneficiaries know what to expect ahead of time. Often, she says people will leave money to charities when they have no other close family.
However, if there are potential beneficiaries expecting an inheritance, Laredo says testators can reduce the chance of a legal battle later by explaining the reasoning ahead of time.
“If you have a sizable estate, they may or may not decide to challenge the will, depending on how it’s been drafted,” she says. “That can tie up the estate for years.”
Having a conversation also gives a testator an opportunity to change their mind.
“It’s really important to revisit your will regularly, and talk it through — before it becomes too late,” Laredo says.
Another party that Laredo says testators should consult before making a charitable bequest is the charity itself. Although you can be pretty sure that they will be happy to accept cash, she says when property or other illiquid assets are involved, the charity may want to give its view on what should happen. For example, a client of hers recently left her condo to a medical charity.
“Generally, what happens in that situation is that the charity will accept the gift through a bequest once the property has been liquidated by the estate trustee,” Laredo says. “But if you own some property that could be of use to the charity, they may want to keep it. Say you have a chunk of farmland and you plan to give it to an equestrian charity, you should check how they want to structure it.”