When creating an estate plan, many individuals wish to leave a lasting impact. For some, that means leaving behind assets that will establish a long lasting financial legacy for their families. But for others, contributions to meaningful causes may seem more desirable. One effective way to achieve this is by naming charities as a remainder beneficiary.
By designating a charitable organization as a remainder beneficiary, you can leave a lasting legacy and support causes that are close to your heart. Your philanthropic aspirations can continue to make a difference even after you are no longer around.
In this blog, we explore what it means to name charities as a remainder beneficiary, the benefits of doing so, and provide guidance on how to navigate this process effectively.
Understanding Remainder Beneficiaries
Before delving into the specifics of naming charities as remainder beneficiaries, it is crucial to understand the concept of a remainder beneficiary. In the context of estate planning, a remainder beneficiary is an individual, organization, or charity that receives the remainder of an estate or trust after specific distributions have been made to other beneficiaries or upon the occurrence of a predetermined event, usually the death of the primary beneficiary.
A primary beneficiary is the first in line to receive the proceeds or benefits following the death of the trustor. If the primary beneficiary is alive and eligible to receive the benefits at the time of the trust’s distribution event, they will receive the designated assets or benefits.
Here’s an example. If an individual has a trust and has named their sole child as beneficiary, that child would be considered the primary beneficiary. However, if that child passes away and there are still assets remaining in the trust, the remainder beneficiary would then inherit the remainder of the assets. For context, that could be the child’s child, an organization such as a school, or a charity.
The specific roles and rules governing these beneficiaries can vary based on the type of trust, policy, or estate planning document in question, so it’s essential to specify these designations accurately in your legal documents to ensure your wishes are followed.
Rules & Regulations Governing Remainder Beneficiaries
The specific rules and regulations governing how assets are distributed to charitable organizations can vary depending on the type of trust, estate documents, and the laws of the jurisdiction in which it was established.
What’s most important is that the estate documents clearly and carefully describes how assets should be distributed to the remainder beneficiaries, either by charity name or the general charitable purpose, along with asset distribution instructions.
If the named charitable beneficiaries no longer exist or are unable to accept the distribution, the court may apply the cy pres doctrine, allowing assets to be distributed to a similar charitable purpose or organization that closely aligns with the trustor’s original intent.
A remainder beneficiary may be named in a trust, insurance policy, retirement account, or within estate planning documents, like a will. Here are two specific types of trusts that have slightly different remainder beneficiary nuances:
Charitable Remainder Trusts
A Charitable Remainder Trust (CRT) is a form of irrevocable trust that allows the trustor to make charitable contributions from the trust, while also retaining an income stream from the trust’s assets. Upon the termination of the trust, the remaining assets are donated to the charities named as remainder beneficiaries.
Special Needs Trusts
Prior to 2022, charitable organizations were not allowed to be named as remainder beneficiaries of a special needs trust. Given the ambiguity of the original Secure Act passed in 2019, its successor, the Secure 2.0 Act, passed a new law that allows charities to be named as the remainder beneficiary of a special needs trust receiving retirement assets. This provision went into effect at time of passage.
Advantages of Charities as a Remainder Beneficiary
By designating a charity as a remainder beneficiary, you can ensure that your philanthropic goals continue to be fulfilled long after you’re gone. Charitable organizations rely on the generosity of individuals to carry out their mission and make a positive difference.
By including them in your estate plan, you can support their vital work and contribute to causes that are important to you and your family. Whether it’s supporting education, healthcare, environmental conservation, or any other worthy cause, your estate plan can reflect your passion and create a better future.
Beyond leaving a lasting legacy, naming a charity as a remainder beneficiary also comes with its own tax advantages. The tax benefits of distributing assets to charitable organizations can include:
- Income Tax Deduction
- Capital Gains Savings
- Income Tax Savings
- Estate Tax Benefits
It is always advisable to consult an accountant and financial advisor who specializes in estate planning to help you structure the trust in a way that maximizes tax benefits, while still aligning with your philanthropic goals.
Choosing a charity as a remainder beneficiary also provides you with flexibility and control over your assets. You can specify how your funds will be used by the charity, ensuring that your donation supports the programs or initiatives that matter most to you. It allows you to contribute to the charity’s long-term success and make a meaningful impact on their work.
Assets within a charitable remainder trust are typically protected from creditors.
How to Designate Charities as Remainder Beneficiaries
Before committing to naming a charity as a remainder beneficiary consider consulting with an estate planning attorney and a financial advisor for overall legal and tax guidance.
Choosing the Charity: If you’re ready to move forward with naming a charity as a remainder beneficiary, it’s time to select the organization or organizations. Before outright naming the organizations, it’s essential to reflect on the charity’s mission, goals, and values and how they align with your own philanthropic goals.
Consider connecting with a member of the organization to better understand how donations are used to accomplish their goals. At this time, you’ll also want to ensure the charity has a known Employee Identification Number (EIN), which is required for all nonprofit organizations and important for tax filing purposes.
Due Diligence: There are dozens of watchdog organizations that sniff out poorly rated charities. Sites like Charity Watch and Charity Navigator offer credible information on a charity’s overall rating, reviews, executive compensation, and transparency. After landing on a short list of charities, consider performing some minor due diligence to ensure your assets are in the right hands.
Settle on the Charitable Gift Vehicle: If you haven’t yet established how the charitable donation will be made, it’s now time to establish the charitable gift vehicle. This could be written into a Will, Charitable Remainder Trust (CTR), irrevocable trust, Special Needs Trust, or as a remainder beneficiary designation on a retirement account or life insurance policy.
If you’ve settled on a trust to feed donations to the charity, a qualified estate planning attorney can help you draw up the appropriate documentation to ensure your wishes of contributing to a worthy cause are carried out in the future.
If you’re naming the charity as the remainder beneficiary of a retirement account or insurance policy, this may be as simple as updating your account information or contacting the plan administrator to make necessary arrangements.
Record & Review: From time to time – typically every 6 months – review your remainder beneficiary designations to ensure that the named charities still align with your philanthropic wishes and remain open for business. Maintaining records of all relevant documents and communicating your wishes with necessary parties is also helpful to ensure assets are appropriately distributed at the term of the trust.
These steps will help you effectively designate a charity, or multiple charities, as a remainder beneficiary, ensuring that your assets support an important cause you care about after your passing.
Naming a charity as a remainder beneficiary in your estate plan is a powerful way to create a lasting legacy. From ensuring your philanthropic goals are met to enjoying bountiful tax benefits you will not only inspire others to give, but aid in the positive change of a cause close to your heart.
If you’re interested in leaving a lasting legacy on the world of nonprofits, consult with an estate planning professional to explore the best way to incorporate charitable giving into your overall estate plan.