Charitable Estate Settlement: A Primer from the Charity's Perspective, Part 1 of 2

Charitable Estate Settlement: A Primer from the Charity's Perspective, Part 1 of 2

Article posted in Transfer Taxes on 9 February 2016| 2 comments
audience: National Publication, Bryan K. Clontz, CFP®, CLU, ChFC, CAP, AEP | last updated: 17 February 2016


Author Bryan Clontz analyzes the technicalities of the interface between charitable givers and receivers. Part one of his two part series focuses on the estate planning process and some helpful pointers on how to smooth the gift transition after the death of a donor.


By: Gary Snerson, JD, Laura Peebles, CPA and Bryan Clontz, CFP [1]


I. Introduction

As charitable bequests and legacy gifts continue to rise, an increasing number of charities are either anticipating or reacting to the estate settlement process.  If the estate settlement is not handled properly, gifts may create direct and indirect liabilities, shrink, be delayed, result in litigation or be impossible to administer.   

This paper aims to outline the charitable estate settlement process from the perspectives of the donor, the charity, and even the donor’s surviving family.[2] It begins first by considering the form of the gift and resulting tax implications – the actual estate planning. Then it discusses consequences of these gifts to charities. It then outlines a model procedure for donors. Finally, it lists eight potential pitfalls in the charitable estate settlement process.

II.Estate Planning

There are two main considerations during the charitable gift planning process to consider with the settlement process in mind. The first is the how the donor owns the assets that are destined for charity, which can affect whether there will be any need for probate before the assets can be transferred to the charity. The second is the tax implications of the chosen gift, both relating to estate and gift taxes, and lifetime and estate income taxes. This section discusses bequests in wills or revocable trusts, beneficiary designations, charitable remainder trusts (“CRTs”), and charitable gift annuities (“CGAs”).

The most simple, and obvious, gift from an estate planning perspective is the charitable bequest. This form of gift simply leaves property to a named charity in the donor’s will or revocable trust[3]. This is by far the most common way to leave a charitable legacy – around 80 percent of planned gifts are will bequests.[4] Much of their appeal comes from their relative simplicity, as well as their flexibility. Only assets the donor did not use during life are committed, and even then the gift is revocable and modifiable.[5] Should the donor’s estate be subject to the estate tax, the bequest will reduce the size of the taxable estate.[6] However, the donor gets no tax benefit during his or her lifetime, unlike some other forms of gift.[7]

Another simple form of gift is the beneficiary designation, which may be described as a gift by contract. This is easy for donors to make, because it does not even need to be included in a will.[8] Indeed, a will provision cannot override or affect a beneficiary designation. Therefore, these gifts avoid the probate process. Beneficiary designations can be made on financial devices as diverse as retirement plans, IRAs, life insurance contracts, and pay-on-death bank accounts, among others.[9] Depending on the asset, designations can reduce estate taxes using the estate tax charitable deduction and avoid income taxes because the charitable beneficiary is income tax exempt”[10]  The donor’s assets are not impacted during life, and the charity simply receives the remaining balance or a predetermined amount on death. For a beneficiary designation on life insurance, there is an estate tax deduction available, but not against lifetime taxable income (unless the ownership of the policy is also transferred to the charity before death).[11] IRAs and retirement plans can allow tax deductions on both estate and income taxes, but these deductions are much more complex.[12] It is crucial to determine if the plan permits a charitable beneficiary to be named.  In addition, for married donors, all qualified plans are subject to one of two forms of federal spousal rights, but those can be waived by the non-participant spouse to allow a full or partial charitable designation.

If the donor wishes to give the charity a gift in the most tax-efficient manner, the most likely asset to use is an IRA or qualified plan.  If those assets are distributed to a non-charitable beneficiary, the recipient generally will pay income tax on them. Therefore, most planners recommend designating a charity as the beneficiary of an IRA as a means of fulfilling a charitable gift.  However, over time, the value of those accounts may shrink due to investment losses, required minimum distributions, and voluntary withdrawals from the account by the owner. Therefore, if the donor wants the charity to receive an amount certain, a back-up clause in his or her will may be needed:  something along the lines of “to the extent that Charity does not receive at least $1M from my IRA accounts, I hereby bequeath to Charity the difference between $1M and the date of death value of my IRA accounts, to be funded by assets selected by my executor.”

Thinking about IRA designations, it may be wise to back up that designation with a bequest of the IRA under the donor’s will.  Due to the number of bank mergers and changes in custodianship of IRAs over time, the charitable beneficiary designation may be misplaced by the custodian.  Although not as efficient for tax or administrative purposes as an outright beneficiary designation, passing the IRA through the estate and on to the charity is better than losing out entirely.

If a donor has an outstanding charitable pledge, and that pledge is enforceable under state law, then the charity has standing as a creditor, rather than as a beneficiary under the will or trust.  This generally will result in quicker payment of the amount remaining on the pledge, as creditors must be paid before even specific legacies.[13]

Pay-on-death accounts have limited tax benefits, but are deductible in calculating the taxable estate as a charitable bequest. Pay-on-death accounts can backfire on the donor and the charity if the charity is not properly named.  In such a case the non-charitable beneficiaries may claim that the gift was not completed.  Such a claim is likely if the debts, taxes and expenses of the estate exceed the available liquid assets in the probate estate or substantially impact the beneficiaries taking through the probate estate.

CRTs are more complex instruments, both from planning and tax perspectives. They require carefully prepared documents that comply with Internal Revenue Service regulations, to ensure the most favorable tax treatment. They come in two flavors – inter vivos and testamentary. Essentially, an inter vivos CRT works by transferring assets in trust during the donor’s lifetime.[14] The donor retains a life annuity or unitrust interest, and receives distributions from the trust.[15] Married donors often give their surviving spouse a successor life interest. CRTs can also be established at death through a will or trust provision with the spouse or another individual as a beneficiary. Upon the death of the last income beneficiary (or the term of the trust for term CRTs), the trustee transfers the assets to the charitable remainderman subject to the terms of the trust document. 

CGAs are contracts between the donor and the charity.  The asset or assets used to create the CGA belong to the charity upon transfer.  Therefore there is no transfer on the death of the donor unless the CGA is created by the donor’s will.  If the CGA was created during the donor’s life, which is usually the case, the death of the donor relieves the charity of any further responsibility to make future payments. The exception would be when the CGAis a joint and survivor annuity and the spouse survives the donor.  Because of the timing of the payments by the charity, and possible delays in the charity becoming aware of the annuitant’s death, it is possible that the decedent’s estate may owe the charity a portion of the payment already made or charity may owe the estate a portion of the payment to be made.  In either case the charity should make the executor aware of these circumstances.

III.Consequences to Charities

How do charities treat gifts left to them as part of estate planning? The answer depends on the form of the gift (discussed above for donors), as well as the nature of the gift. These factors combine to inform both how (the value) and when (the recognition) the charity reports the gift. Further, although charities are exempt from income taxes due to their 501(c)(3) status, they may still be impacted by tax issues relating to settlement of the whole estate in which they have an interest.

Determining the value of gifts is an important task for charities. Not only can the true value of a gift sometimes not be immediately ascertainable, deferred gifts such as CRTs can have  uncertain values. Add to this gifts that could be revoked such as POD accounts or life insurance beneficiary designations and it is sometimes unclear whether a completed gift has been made at all. Even if a beneficiary designation on a policy is irrevocable, if there are future premiums due, failure of the donor to pay the future premiums could cause the gift value to diminish or vanish.  Therefore determining the value of a gift can be a complex task.

The easiest gifts to value are, of course, outright cash gifts - they are given full value.[16] However, many outright gifts do not have that immediately discernable value; even though the charity has access to them (the assets are “available for the charity’s current use”).[17] If the donor imposes a restriction on the use of the asset it may adversely impact the value of the gift.[18] In that circumstance, the generally accepted practice is to determine the fair market value.[19] In some cases, this is easy, such as when the gift takes the form of publicly traded securities.[20] However, if there is no readily ascertainable value, there may need to be an appraisal, or utilization of “valuation techniques, such as the present value of estimated future cash flows.”[21] Similar financial valuation techniques will need to be deployed for deferred gifts, like CRTs, that have a definite value to the charity when the trust is funded, even if the assets are not immediately available.[22]  Valuation of all CRTs whether trusteed by the charity or by an outside organization must be valued and reported annually under The Financial Accounting Standards Board (“FASB”) rules.  These rules now also apply to realized bequests that have not yet been funded and/or paid.  Revocable gifts (a bequest in a will or revocable trust, or a beneficiary designation of retirement plan assets, for example) require a similar calculation, where the probability of the gift eventually being made should be taken into account in valuing the gift.[23]

Special consideration should be given to illiquid gifts, such as artwork, mineral rights or intellectual property rights. These sorts of gifts tend to require special care and expertise when it comes to valuation. FASB recommends that donated artwork and historical treasures be recognized normally if the items meet a number of requirements relating to display, care, and disposal.[24] Mineral rights are more complex, and charities receiving such gifts must do extensive (and sometimes costly) due diligence,[25] including investigating the legal title status of the rights.[26]  Ancillary probate proceedings may be required to establish such legal title.  The value of intellectual property such as copyrights or website domain names should not be overlooked. A bequest of a work of art may or may not include the copyright:  whether that is included or not will significantly affect the value.  Executors and administrators unfamiliar with these matters may need specialized counsel.

The other factor charities must consider is when they should recognize the gift. For example, if a donor has irrevocably pledged life insurance (with the charity as the policy beneficiary), the value of that gift might be easily determined, but the time at which it is recognized is not immediately clear.  As indicated above, charities should consider requiring the donor to transfer ownership of the policy along with the beneficial interest at the time of the gift. If the policy is not fully paid up at the time of the gift, arrangements must be made for future premium payments, or conversion to a paid-up policy, to avoid a policy lapse. If the donor pays the premiums after the charity owns the policy, the donor is entitled to additional tax deductions for the amount paid.  As a baseline, consider an inter vivos gift of cash, which clearly would not be part of any estate settlement process. This outright gift can “recognized as revenues … in the period received.”[27]

This is the general approach which should be taken – contributions should be recognized when received. FASB recommends that “unconditional promises to give” be recognized as received when the promise was made, rather than the asset actually received.[28] However, “to be recognized in financial statements there must be sufficient evidence in the form of verifiable documentation that a promise was made and received.”[29] Usually this takes the form of an irrevocable pledge binding the donor and the donor’s estate.  For assets pledged in a bequest that was revocable during the testator’s lifetime, once the donor dies, the charity can recognize the value of those assets before the assets become available, because the bequest is irrevocable once the testator-donor dies (see comment above).  A similar approach could be taken for a pay-on-death bank account or life insurance. For CRTs (whether inter vivos or testamentary) and CGAs, the assets are received when the irrevocable document or trust comes into effect (although the valuation question is more difficult, as discussed above).

Another consideration for the recipient charities is the interaction between taxes during estate administration and bequests to the charities. These taxes can include both the estate tax and income taxes. Although estates (and some trusts) can deduct from income amounts distributed to charities, the charitable beneficiaries should work with estate executors to ensure that they receive everything the donor intended.[30] Charities should be similarly careful with regard to the estate tax, when that tax has been apportioned to a charitable residue.[31] They should review estate tax clauses and returns to make sure that any tax payments by the executor were in accordance with the donor’s expressed intent.[32]  Suggestions for specific due diligence are discussed in the next section.

Part two discusses recommended procedures and potential pitfalls.

[1] All authors are associated with Charitable Solutions LLC, Jacksonville Florida,

[2] This paper does not include any of the special estate administration and tax rules applicable to private foundations. Those will be covered in a future paper.

[3] Throughout this paper, “will” should be read to include a revocable trust used as a testamentary substitute

[4] PG Calc. (Feb. 2011). “Bequest-Like Gifts That Don’t Require a Will.” Retrieved from

[5] Id.

[6] Silverman, R.E. (2011, October 1). “The Quest for the Right Bequest.” Wall Street Journal. Retrieved from

[7] Id.

[8] PG Calc, supra note 3.

[9] Id.

[10] Midura, T.S. (2009). “Handling Charitable Bequests and Charitable Trusts.” Illinois Estate Administration, p. 8. Retrieved from

[11] Dagher, V. (2013, September 18). “Donating a Life-Insurance Policy to a Charity.” Wall Street Journal. Retrieved from

[12] American Institute for Cancer Research. (2014). “Tips and Traps on Retirement Accounts and Other Charitable Beneficiary Designations,” p. 6-7. Retrieved from

The Harvard Manual on Tax Aspects of Charitable Giving, Ninth Edition, 2011, p. 166-167

[13] Beckwith and Allan, 839-2nd T.M. Estate and Gift Tax Charitable Deductions IV.A.5.

[14] Gessaman, P.H. (1996). “Charitable Remainder Trusts and Charitable Annuities as Estate Planning Tools.” NebFacts. Retrieved from

[15] Id.

[16] Partnership for Philanthropic Planning. (2009). “Guidelines for Reporting and Counting Charitable Gifts,” p. 14. Retrieved from

[17] Partnership for Philanthropic Planning. (2011). “Valuation Standards for Charitable Planned Gifts,” p. 16. Retrieved from

[18] See Revenue Ruling 85-99, 1985-2 C.B. 83.  See also Gen. Couns. Mem 393801 (July 9, 1985) and Piv. Ltr. Rul. 88-12-003 [Harvard Manual chapter 1, section 104.4 pages 25-26].

[19] Financial Accounting Standards Board. (1993). “Statement of Financial Accounting Standard No. 116: Accounting for Contributions Received and Contributions Made,” p. 8. Retrieved from

[20] Id.

[21] Id.

[22] “Valuation Standards for Charitable Planned Gifts,” p. 16.

[23] Of course, this discounting is necessarily inexact, and should only be used internally. Id., p. 23-24.

[24] Financial Accounting Standards Board, p. 7. Specifically, these conditions require that the art or treasures: “a. Are held for public exhibition, education, or research in furtherance of public service rather than financial gain[;] b. Are protected, kept unencumbered, cared for, and preserved[;] c. Are subject to an organizational policy that requires the proceeds from sales of collection items to be used to acquire other items for collections.”

[25] Ferral, K. (2014, November 2). “Mineral Rights, Royalties Flowing to Western Pa. Charities.” Tribune-Review. Retrieved from

[26] Hancock, J. (2009, September 10). “Black Gold: Gifts of Oil and Gas Interests Made Simple.” Oklahoma Planned Giving Council, p. 8. Retrieved from

[27] Financial Accounting Standards Board, p. 6.

[28] Id.

[29] Id. Further, if no clear promise was made, the gift may still be considered received if there is an unconditional intention that is legally binding.

[30] Katzenstein, L.P. (2011). “Estates with Charities as Beneficiaries: How Do We Protect Their Interests?.” Saint Louis Planned Giving Council, p. 1. Retrieved from

[31] Id., p. 5-11.

[32] Id., p. 9.

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Re: Charitable Estate Settlement: A Primer from the ...

Excellent article, Bryan! I appreciate your skill and insights.

Re: Charitable Estate Settlement: A Primer from the ...


Many thanks for your kind comment and I will actually take full credit - mainly because I asked Laura Peebles and Gary Snerson to write it! Note that my name is third so I am much more the caboose than the engine.



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