Many people desire to tithe both during life and after death. Accordingly, giving 10% of their estate to their church (or other charity) is often a goal for a couple contemplating estate planning. But, there is nuance to uncover in this kind of goal and perhaps a better way to structure the gift after you pass which leads to both better tax ramifications for your heirs and less administrative complexity.
First, what is the administrative complexity? Assume a gross estate of $1M and a couple wants to give 10% (or $100k) to church and the remainder to their two adult children. There are two main ways to do this in the Will. The first is called a pecuniary gift consisting of a sum certain (“I give $100k to my church”). The second is a type of fractional gift (“I give 10% to my church”).
Assume further that the eldest child (let’s call her “Sue”) is the named executor under the Will, charged with following its provisions. In the case of a pecuniary gift, Sue has a simple job: she must ensure that the church receives $100,000…no more and no less. Once Sue can deliver that check to the church, her obligation to the church ends.
In the case of a fractional gift, Sue’s job is much more complicated. First, because the church is entitled to receive 10%, the church gets to know “10% of what?” That means that the church is entitled to an inventory of all assets of the estate. Further, to deliver the 10% to the church will likely require action. It will require Sue to sell assets like the parents’ residence and their vehicles. So, the church will also be entitled to see how Sue sells the assets and the price obtained.
Because estate expenses (including any creditor claims) impact the definition of “10%,” the church would also be allowed to see the various expenses incurred throughout the pendency of the probate to include any fee charged by the executor – in this case, Sue. Sue would detail all of these items through both a formal inventory and an accounting to show all monies going in and how any monies were spent. Not only is the information provided to the church much greater in the case of a fractional bequest, but the church can also challenge the actions of the executor if the executor has failed in some way of delivering exactly 10% of the value of the estate to the church. At the end of the day, it means there is another party to oversee and challenge the actions of the executor.
In most circumstances (and in this author’s experience), the church is not likely to quibble over small accounting issues. But it has the right to quibble. Assume Sue sells the family car to her sister’s child at a discount. An action like that technically deprives the church of the full fair market value of 10% of the car and violates the strict provisions of the Will.
The pecuniary gift outlined above avoids all the oversight. The church has no right to see an inventory or expenses or what happens in the administration of the estate. So long as the church receives the pecuniary gift, it has no other rights.
The challenges of a fractional gift can compound with more beneficiaries as well. Assume split 10% among ten different charities. Each of those ten charities would have all the rights outlined above pertaining to fractional gifts.
So, the fractional gift is more complex for your heirs, namely your executor. But, the tradeoff is that it offers simplicity in drafting and less need to revisit the amount as would be required with a pecuniary gift.
As I have written about previously here, a better suited asset to use for charitable giving (including gifts to church) is the pre-tax retirement account. It allows a couple to reserve better assets for their heirs (assets that are not subject to ordinary income tax). And, it is easy and (usually) free to update retirement account beneficiary designations. Plus, your executor will not need to have any third party overseeing his or her actions as executor.
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The opinions voiced in this material are for general information only and not intended to provide specific advice or recommendations for any individual or entity. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
