How To Leave Money To Charities After You Pass

You have more tools than just a will

Sharon Waters,

AARP

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Published November 06, 2023

"LEGACY" is spelled out in wooden letters on a wood-grained background

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Designating part of your assets after death to one or more charities is a noble way to make an impact. And you don’t need to be a millionaire to do it.

“You do not have to be wealthy to leave a charitable bequest. It is not about the dollar amount. It is about leaving a legacy for a charity or organization that may be of significance to you,” says Sheila Samuels, a trusts and estates attorney with offices in New York and New Jersey.

Including gifts to charities in your estate plan can alleviate any concerns about donating too much too early and possibly overextending yourself if you need your nest egg for long-term care or other expenses. You can feel generous now by giving later, while keeping a cash cushion.

But the post-death donation process requires forethought to ensure your wishes are carried out after you are gone.

There is not one best way to give a bequest to charity, according to experts. “Like so many answers related to financial planning, it depends,” says James Lee, a certified financial planner based in Saratoga Springs, New York, and president of the Financial Planning Association. “One must determine the personal and financial goals of the charitable gift. The best charitable gifting strategy will depend on your charitable and financial goals, as well as your personal preferences.”

We talked to experts about different ways to leave money to charity and what you need to know when including nonprofits in your estate plan.

Give to charity off the top

One approach is to list one or more charities in your will or trust. The charitable bequest could be cash, investments, a house or personal property such as a car or furniture. Make sure you specifically identify each nonprofit so it is clear which organization should receive the gift, says William D. Kirchick, a Boston attorney and past president of the National Association of Estate Planners & Councils. “There are a lot of charities that have similar names,” he says. Make sure you get the charity's full legal name as well as its taxpayer identification number; most charities have this on their websites.

You can list as many nonprofits as you wish, but make it apparent how much should be distributed to each one.

Designate certain accounts to nonprofits

Another approach is to name a beneficiary on an investment account, such as an IRA or 401(k). These qualified retirement plans will be distributed to named beneficiaries – whether they are a person or a nonprofit. Tax strategies play a role too. Qualified retirement plans are usually the most heavily taxed if they are not left to a surviving spouse, so designating a child or other person as a beneficiary may hit the heir with income taxes. But a 501(c)(3) nonprofit that is the beneficiary of a qualified retirement plan won’t pay any tax, which maximizes your donation. Proceeds from a life insurance policy are generally tax free, so you could minimize the bite of taxes by gifting a retirement account to charity but an insurance policy to heirs.

You can also name a charity as a “transfer on death” or “paid on death” beneficiary for bank accounts. Designating beneficiaries can help avoid probate, a legal process where a court oversees the distribution of the deceased’s assets and that may require costs such as filing fees.

If you are designating certain accounts to different people or charities, consider that the value of the investment could change, with some charities receiving more or less than you had intended. For example, maybe one account is a high-growth fund while another is a CD. One way to avoid this is to designate the same beneficiaries on each account.

Rules can vary by state for how estates are handled, so it is wise to hire a lawyer when you write your will and also discuss the various methods for leaving money to others. “It’s important to review the beneficiary designations on your retirement accounts, your will, your trusts and life insurance policies to make sure your charitable wishes are carried out effectively,” Lee says.

Recognize the power of percentages

When designating multiple beneficiaries on an account, it is best to specify a percentage for each person or entity, adding up to 100 percent. Designating dollar amounts can backfire because the value of the account will likely fluctuate after you fill out the beneficiary form.

For example, let’s say you have $100,000 in an account and you specify $50,000 to a nonprofit and the balance to your nephew; he may get nothing if the value drops below $50,000. If it is a retirement account, required minimum distributions could decrease the value too, especially if you designated the beneficiaries a long time ago, with the RMDs eating away at the balance.

Or perhaps the account shoots up in value and you would have preferred for the charity to receive more. “It may go up or down in value,” says Kirchick about the asset. “It is better to leave a percentage. The heirs are guaranteed minimal amounts and may even get more.”

Consider donor-advised funds

A donor-advised fund is essentially an investment account used to give money to nonprofits. After setting up a donor-advised fund with a financial institution, such as Vanguard, Schwab or Fidelity, you make donations to it and receive a tax writeoff in the year of your donation. The financial institution makes the contributions to charity, at your instruction. Of course, that involves administrative work by the financial institution so you will pay a fee for them to maintain your donor-advised fund.

After you die, assets from your estate can be contributed to the fund and dispersed to nonprofits you have designated. You can also designate a donor-advisor fund account as a charitable beneficiary for an investment account or in your will. The advantage is you can complete your estate planning now but later change the charities you want to support by updating your list with the donor-advised fund, instead of having to pay an attorney to update your estate planning documents. This option may appeal to people who are reluctant to complete estate planning because they fear their charity preferences may change in the future.

Don’t forget the larger point

The act of giving matters more than the amount.

“Every dollar makes a difference to a nonprofit organization,” says Lee. “No matter what the numbers are in your bank and investment accounts, you should make decisions on how you want your assets to be distributed after death. Once you make that determination, organize your estate planning documents and beneficiary designations to ensure they reflect your goals and wishes.”

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Sharon Waters, a former CPA, has written for Wired.com and other publications.