Charitable giving in your will

Most people who give to charity during their lifetime never put any of it in their will. Either it doesn't occur to them, or they assume the kids should get everything, or they don't realize how easy it is. The mechanics are simple. The choice of vehicle has tax consequences worth knowing.

Three ways to leave money to charity

1. Bequest in your will. Plain and direct: "I leave $25,000 to the American Red Cross" or "I leave 10% of my residuary estate to St. Jude Children's Research Hospital." Two flavors:

• Specific bequest — a fixed dollar amount or specific item.
• Residuary share — a percentage of what's left after specific gifts and debts.

Residuary shares are usually better. They scale with your estate, so if you have a great year and your estate doubles, the charity benefits. They also adjust naturally if your estate shrinks — you don't accidentally leave the entire residuary to charity because you wrote in a fixed amount that turned out to be more than you had.

2. Beneficiary designation on a retirement account. This is the most tax-efficient gift you can make. Your IRA or 401k passes by beneficiary form, not by your will. If you name a charity as beneficiary, the charity (which doesn't pay income tax) receives the entire amount. If you name a child, the child pays income tax on every distribution. So a $100k IRA to charity = $100k to charity. A $100k IRA to your child = ~$70k to your child after tax.

3. Charitable Remainder Trust (CRT). Worth knowing about even if it's not for you. You transfer appreciated assets (often stock) to the trust. The trust pays you (or you and a spouse, or you and another person) a percentage for life or a term of years. When the trust ends, what's left goes to charity. The benefits: you get a partial income-tax deduction now, you avoid capital-gains tax on the contributed asset, and you get a stream of income. Useful when you have appreciated stock you'd otherwise pay big capital gains to sell.

How to choose

For most people leaving most charitable bequests, the choice is between (1) and (2). The rule of thumb:

• Use beneficiary designations on retirement accounts for the bulk of charitable giving. Maximizes the tax benefit.
• Use will bequests for specific charities, smaller amounts, or to set residuary percentages.

If you're giving to multiple charities, mixing both is fine. A typical pattern: name your spouse as primary beneficiary on the IRA, name three charities as contingent beneficiaries (one-third each) so they take if your spouse dies before you. Then in the will, leave specific bequests to organizations you care about, and have the residuary go to your children.

The "where" matters

If you're between two charities you support equally, look at how each is registered. A 501(c)(3) public charity (most familiar names — universities, hospitals, traditional nonprofits) gives you the maximum income-tax deduction in life and full estate-tax deduction at death. A 501(c)(4) advocacy organization gets the estate-tax deduction but typically not the income-tax deduction. Sometimes that matters; usually it doesn't.

Donor-advised funds (DAFs) can also be a destination. You name the DAF as beneficiary in your will or on a retirement account. The DAF then distributes to charities you specified — often over many years, which can be useful for charities that can't easily absorb a large lump sum.

Naming a charity correctly

The most common bequest mistake: vague organization naming. "I leave $10,000 to the cancer society" is ambiguous (American Cancer Society? Susan G. Komen? a local one?) and creates probate delays.

The fix: include the legal name and EIN. Most charities have a "How to leave us in your will" page with the exact wording. Use it.

Example: "I leave $25,000 to the American Cancer Society, Inc., a Delaware nonprofit corporation, EIN 13-1788491, located at 250 Williams Street NW, Atlanta, Georgia 30303."

If the charity has merged or dissolved by the time you die, well-drafted gift language redirects the gift: "If the named organization no longer exists, then to a charitable organization with substantially similar purposes, as my executor determines."

A note on tithing in retirement

If you give 10% of your income to a religious organization, that often translates to wanting to leave some percentage of your estate the same way. The mechanics are exactly as above — bequest, beneficiary designation, or CRT — and the tax benefits are the same. Religious organizations generally are 501(c)(3) public charities and qualify for the full deduction.

The simpler the charitable plan, the more likely it actually happens. A residuary share in your will or a beneficiary form on your IRA is the easiest, lasts forever, and accounts for over 90% of all charitable bequests in the U.S. The fancy structures matter for the few cases where they save serious tax — for everyone else, simple works.