Updated: Feb 3, 2020
Recent studies estimate that some 42%* of planned gifts come from bequests. Yet, these gifts only represent 8%* of all giving. Reading between the lines of these results tells me that many of the planned giving departments at all of the major institutions are waiting a very long time for the preponderance of their gifts. In fact, it seems that many of the planned giving leaders are missing some big opportunities to bring gifts forward sooner through other planning methods. Further, with the increase of the estate exemption, the utilization of the bequest as a method to eliminate estate tax at the end of a donor’s life will likely become less and less meaningful and bequest are very likely to diminish in the future. Are there better gifts to consider than bequests? Let’s consider these “final four.”
Four Bequest Alternatives for Planned Giving
The LEGA-C plan™ which utilizes a retained life estate in the donor’s residence (principal or otherwise) and then transfers the remainder in exchange for a Charitable Gift Annuity. In this modern age of the dispersed family, in many instances, the children don’t want the family home for themselves. In fact, having to market it after their parents pass away is often a huge burden. Take the home out of the estate, grant income to the parents, let them age in place for as long as possible and secure a gift immediately.
Testamentary CRT: Consider the taxable estate loaded with illiquid real estate or a closely held business. Using a CRT or CRTs for the next generation will transfer a remainder interest out of the taxable estate and can provide some estate tax relief. While this may seem like a reach, experience tells me that there are a countless estates that have very little planning done and many families are caught by unpleasant surprise at the death of the business owner. While not a perfect solution, proper structuring can help keep things together.
Testamentary IGNIT Plan™ also known as a multi-generational young pooled income fund. This will look like the testamentary CRT from above but with the ability to add income beneficiaries who are much younger than the limited ages allowed by the CRT. Again, the “discount” to the estate can be significant enough to reduce or eliminate the estate taxes significantly and the simplicity of the transaction is beguiling.
TCLAT with a twist: I wrote about this in a prior article with Dan Rice. The testamentary charitable lead annuity trust is an often used strategy to “zero out” the estate by taking all of the assets that are over the exemption amount and dropping them into a TCLAT using a formula for time and payout percentage that gives a “zero” gift amount. The complaint from heirs is that they may have to wait twenty or thirty years for the CLAT to terminate. With the twist of buying the assets with a note, that complaint should disappear. It’s a little complicated but worth it if the stakes are high enough.
There you have it, my final four. Who’s going to win is yet to be determined. Seriously, these alternatives to bequests should be in every planner’s playbook. One of the fundamental duties I undertake when reviewing estate plans is to look through the documents to see if they contain bequest language. It provides a wonderful opportunity for further discussion and for more effective planning.
*2016 “The 2016 Planned Giving Study” Pentera and IUPUI Lilly School of Philanthropy