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Oklahoma Bar Journal

Testamentary Charitable Planning: Supporting Your Clients and the Community

By Christa Evans Rogers

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As attorneys, many of us regard pro bono work as the legal profession’s preferred mechanism to give back and satisfy our obligation to render “public interest legal services.”[1] While this is a much-needed and important method for lawyers to support our communities, there are a myriad of ways for us to be part of the fabric of philanthropy and use our specific talents for the public interest.[2] Frontline charitable organizations cannot achieve their missions without funding. Attorneys are uniquely positioned to bolster that critical fundraising endeavor within their paid practices by discussing testamentary charitable estate planning with their clients. With proper drafting, attorneys can simultaneously maximize philanthropic impact, advocate for clients, protect heirs’ interests, as well as minimize – or even eliminate – income, gift and estate taxes. This article explores the benefits of helping clients pass along their values with their valuables.

THE ADVISOR’S ROLE IN UNDERSTANDING AND ADVOCATING FOR CLIENTS WITH TESTAMENTARY CHARITABLE INTENT

For clients with a pattern of giving, charitable estate planning provides an attractive extension of their philanthropic efforts. Often, a testamentary charitable gift is not only a client’s last donation but also their largest. In 2022, Americans gave roughly $499 billion to charity, with 9% (roughly $45 billion) coming from testamentary charitable gifts.[3]

Donors have numerous motivations when considering testamentary charitable gifts. Many are spurred by preserving a personal legacy or honoring a loved one with a permanent tribute. Others have concerns about asset preservation during their lifetimes but would gladly make a gift upon their passing when longevity risks or end-of-life care costs are no longer a factor. Some have a heart for giving back and simultaneously a desire to reduce potential estate and income taxes for their heirs. Other clients may seek to distribute income over time in a controlled manner for their loved ones’ lives or a term of years, with a benefit to charity upon termination of the income interest.

Charitable giving can be a critical component of tax-efficient estate planning.[4] Clients look to trusted advisors for guidance when considering their financial needs, later-in-life care and estate planning needs. As a part of those considerations, many clients expect attorneys to discuss charitable giving.[5] If we neglect to consider our clients’ philanthropic interests as a matter of course, we have not conducted a comprehensive assessment of their goals, which may inadvertently expose them to unwanted and unnecessary tax consequences, as well as ultimately reduce the impact of their potential gifts.

IDENTIFYING AND ASSISTING CLIENTS WITH A HEART FOR PHILANTHROPY

It is hard to uncover a client’s interest in charitable planning without explicitly asking if they are amenable. Some advisors feel apprehensive posing questions about charitable giving, fearing it will spark an uncomfortable conversation or believing the onus instead falls on the client to raise the issue. In truth, incorporating charitable giving questions conveys concern for the client’s best interest.

As attorneys, we routinely undertake incredibly private conversations, delving into intimate personal and financial subjects to which even our clients’ closest family members and friends may not be privy. Astute attorneys raise these matters with respect and the appropriate level of gravitas, and clients typically anticipate these issues will be addressed within the confines of privileged conversations. In the same vein, when raised appropriately, clients expect and appreciate questions surrounding charitable giving to be broached by their trusted advisors.[6] Many attorneys find it a comfortable and natural part of the factfinding process.

Estate planning attorneys create custom intake forms to capture everything – from simple details, such as contact information, to the intricate specifics of their clients’ assets and planning preferences. Incorporating charitable gift questions into these intake forms proves an excellent way to gauge client interest and delicately open the door to charitable conversations. A simple “check the box if interested in making a charitable gift” may both spur a client to leave a gift and open the door for the conversation.

KEEP IT SIMPLE: CLARITY COUNTS!

Effective practitioners have shifted away from complicated legal jargon and have instead embraced the simplicity of plain English and layperson’s terms. Studies show a dramatic difference in charitable giving based solely on the phraseology of the questions posed.[7] The simplicity of asking “Do you wish to make a charitable gift in your will?” may increase the likelihood of giving versus the more complicated phrasing of “Do you want to leave a charitable bequest in your estate plan?”[8]

While the two questions feel synonymous and interchangeable to trained attorneys, the latter option can feel baffling to clients. It is a natural reaction to avoid what feels confounding rather than ask for clarification. A significant client segment who would perhaps respond affirmatively if asked in a more straightforward manner may instead forgo the gift based solely on the perplexing or unfamiliar language.[9]

DRAFTING CONSIDERATIONS FOR TESTAMENTARY CHARITABLE GIFTS: WHO, WHAT, WHEN, WHERE, WHY AND HOW

Drafting attorneys weigh many factors when crafting testamentary charitable gift language. To express it in journalistic standards, the attorney needs to ascertain the who, what, when, where, why and how of the gift. There are nuances that if not addressed in the drafting phase can obfuscate and frustrate the donor’s true intent in the eventual distribution phase. Typically, donors harbor quite precise ideas of how they envision their charitable gift will bless others. This inclination varies dramatically from donor to donor. Obligingly, many charitable organizations publish or eagerly share their preferred testamentary charitable gift language, which can be accessed online or requested via email.

WHO BENEFITS?

Charitable Beneficiaries

Foremost, the bequest language details which charitable beneficiaries should receive distributions. If the client identifies more than one charitable beneficiary, the drafting attorney should list what percentages or amounts each charitable beneficiary should receive. In some cases, there are specific assets gifted to certain beneficiaries for particular purposes. If this is the case, a property description should also be included for example, gifting a vacation property as a retreat or a ranch for nature conservancy.

Still, in other instances, the donor may nominate a loved one to make grants after their passing through a donor-advised fund.[10] This has become increasingly popular for those who want to incorporate generational philanthropy. Some clients will create an endowment that is distributed annually to a donor-advised fund with family members listed as the account advisors. This proves an economical and less administratively cumbersome alternative to private family foundations. In certain cases, the donor may limit the grants to enumerated fields of interest as defined by the donor before death, such as distributions to the beautification of a geographic area, education, health research or a religious-related mission.

Ethical considerations may arise for charitable beneficiaries.[11] Attorneys should stay vigilant and verify no undue influence has been exerted by the organization. It is important to remember that although the charity may have a critical role in soliciting the gift or sharing recommendations on gift language, it should not have a representative present at the execution of the estate plan itself. If there has been active involvement of the charitable organization prior to execution, the attorney should ensure clients leave testamentary charitable gifts willingly and without duress.[12]

Noncharitable Beneficiaries

Charitable estate planning can include providing income interests that benefit noncharitable beneficiaries prior to the distribution to the charitable beneficiary. The drafting attorney should assess which giving solutions are preferable based on factors such as the amount of the charitable gift, the amount payable to noncharitable beneficiaries, tax goals, gift administration costs, the location of the charitable organization, the age of the noncharitable beneficiaries and the states in which the donor and noncharitable beneficiaries are domiciled. A testamentary charitable gift annuity, charitable remainder trust or other trust arrangement may satisfy the donor’s overall intent. Charitable planned giving arrangements that include both charitable and noncharitable interests can quickly become complex. There are numerous local community foundations that are happy to serve as a resource for you as you advise your clients about charitable giving. These services include preparing tax illustrations and giving instruments such as charitable remainder trust agreements, donor-advised fund agreements and charitable gift annuity agreements.

WHAT TO GIVE?

Client preferences on what they give to charity run the gamut, with most settling on either a specific dollar amount, particular assets or a percentage of the overall estate value. In some circumstances, it is a combination of all three! One of the great attributes of charitable gift planning is that it is very flexible and customizable. Attorneys, financial advisors and clients can reach creative planning arrangements that support giving goals and achieve tax and income objectives at the same time.

While less than 10% of donors statistically report tax deductions as the primary motivator for charitable giving,[13] as an advisor, communicating the tax advantages of charitable planning reinforces the importance of tax-efficient planning. Tax-deferred assets, such as qualified retirement accounts and IRAs, are ideal assets to leave to charity because of the tax that would be paid by noncharitable beneficiaries.

Knowledgeable drafting attorneys often include a provision explicitly stating that charitable gifts should be paid first from taxable assets. Attorneys should collaborate with clients’ financial and tax advisors to ensure assets are not overlooked in the planning process and that the advisor team has considered planning ramifications from both a tax and legal perspective.

WHEN TO GIVE?

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Timing is yet another critical factor to weigh when drafting testamentary charitable gift language. There is a broad spectrum of when clients may intend funds to be distributed. Some clients desire the full amount of the gift to be put to work immediately and ask that the gift be distributed in its entirety to the charitable organization as soon as possible. Others fall into a separate camp with the unequivocal intent that their gift be dispersed over time and in increments of 3% to 5% a year, typically via an endowment. These gift instruments seem chiefly attractive to donors who crave assurance that the impact of their gift will extend into perpetuity. Endowment investment strategies under the Uniform Prudent Management of Institutional Funds Act[14] are conservative and focus on long-term horizons, with the goal that the value of the gift will continue to outpace inflation, providing equity among subsequent generations. Still others have a preferred distribution schedule including an immediate distribution and an amount held permanently in endowment.

WHERE TO GIVE?

Many clients relay specific thoughts on where they want their funds used within the organization or, conversely, place meticulous constraints on activities they want to avoid funding. In contrast, unrestricted gifts can be spent however organizational leadership deems appropriate. If the client is amenable, it can prove helpful to discuss gift restrictions with the charitable organization in advance of executing the documents to confirm the charity is willing and able to honor the donor’s intent. The drafting attorney should have an explicit provision for what should happen in the event the funds cannot be used for the donor’s specific purpose, temporarily or permanently, or if the charity ceases operations. For example, the charity may conserve the unused funds in a separate rollover account for future distribution for a different purpose or reinvest the unused amount into the corpus so that future distributions are incrementally larger. An alternate charitable beneficiary may also be named if the charity ceases operations.

Motivations for restricted gifts vary and often derive from an emotive or personal prompt. Occasionally, restricted gifts stem from a distrust of current or future management. For example, the donor trusts the current leadership but is uncertain whether the same level of confidence would exist with future leadership. Other donors feel passion for a particular program or desire to benefit a particular geographic region, often their hometowns. Others have witnessed unrestricted gifts be deployed in what they interpret as an objectionable manner, and although nothing unethical or illegal transpired, the donors desire complete control over what their personal gift will and will not fund. Other donors fixate on the funds being directed purely to programming and feel adamant that not a penny be allocated to an administrative purpose. Scholarships are one of the most frequently restricted gift types, with donors often expressing a passion for a certain academic institution, particular student demographic or area of study. Another commonly restricted gift type is medical research, typically focusing on support for a specific condition battled by the donor personally or by a loved one.

WHY GIVE?

Donors typically have multiple rationales for making testamentary charitable gifts. The driving force for most donors, however, remains the desire to bolster a mission that matters to them or honor a moral conviction to give back. Many donors also feel compelled to give in the honor or memory of a loved one, marking the legacy of the individual or family. Some clients are partially motivated by the recognition of naming rights or membership in certain giving societies.

It is imperative attorneys understand if clients prefer to remain anonymous before and after their passing or if and when they would like the future charitable beneficiaries notified of the gift. It is also vital to identify whether the donor wants to disclose the intent to give only or to share the approximate anticipated size of the gift. Charitable organizations appreciate notification when allowed by the donor because they are better able to track gift expectancy calculations, as well as thank and steward the donor appropriately. If the clients would like the attorney to disclose this information, the attorney should have the clients sign a consent to the disclosure specifying the level of detail to be released.[15]

Charitable giving is also a great way to minimize or eliminate the federal estate tax. In 2017, the passage of the Tax Cuts and Jobs Act increased the gift and estate tax exemption to $11.18 million, which has since increased to $13.61 million per person for individuals dying in 2024.[16] This generous estate tax exemption is slated to sunset at year-end 2025.[17] On Jan. 1, 2026, unless Congress takes action to extend the current exemption, the exemptions will revert to the inflation-adjusted rates outlined in 2017, approximately $7 million per person ($14 million for married couples). More clients will be subject to the estate tax at this reduced exemption amount, prompting forward-thinking estate planners to preemptively assess methods to reduce or eliminate the negative tax ramifications. For those limited clients facing potential gift and estate taxes, charitable giving offers an excellent alternative.[18] Making charitable gifts during life or at death will help clients minimize the payment of estate tax resulting from the lower gift and estate tax exemption amounts.

HOW TO GIVE AND RECEIVE FIDUCIARY SERVICES

A devoted charity may agree to serve as trustee, personal representative or agent under financial or health care power of attorney for clients with a substantial charitable estate. While childless clients most often find this an attractive option, some clients with children prefer a trusted charity to serve in lieu of family members because of relationship concerns, geographic proximity, addiction or other reasons. The Oklahoma Charitable Fiduciary Act (OCFA) imposed two primary requirements on a charitable organization’s ability to serve as trustee, which impedes most donors from considering this option.[19] First, the charitable share must meet or exceed 25% of the total estate value.[20] Second, no single noncharitable beneficiary may receive a greater share than the overall share allotted to charity.[21]

If possible, proactive attorneys should consider nominating an alternative fiduciary in the event the charity declines to serve or cannot serve under the OCFA. Foreseeable circumstances include: the charity may be ill-equipped to serve, a trusted individual may change jobs or retire, future leadership may not feel comfortable serving or the charity may elect to serve in financial but not health care capacities. While the charity can collect a fee for serving as trustee, the demands of the client’s care may outweigh the benefits of the amount gifted to the charity whose limited resources may need to be applied to the mission of the charitable organization instead of caring for the donor. For these reasons, a contingency plan is prudent.

CONCLUSION

If you are looking for a fulfilling complement to your practice that also accomplishes your clients’ objectives, consider incorporating charitable giving conversations and strategies. Doing so fosters meaningful connections with your clients, encourages tax-efficient estate planning and funds lasting societal good.


ABOUT THE AUTHOR

Christa Evans Rogers, J.D., AEP, CAP and CFRE, lives in Tulsa with her husband and fellow attorney, Timothy Rogers. Her practice centers on charitable gift planning, and she serves as the vice president of client engagement for WatersEdge. Ms. Rogers has volunteered on the boards of the OBA YLD, the Eastern Oklahoma Association of Fundraising Professionals and the OU College of Law Young Alumni Board and is a past-president of the Oklahoma Association of Charitable Gift Planners. She also serves on the Oklahoma Bar Foundation Board of Trustees.

 

 


ENDNOTES

[1] Rule 6.1, Oklahoma Rules of Professional Conduct, 5 O.S. § Rule 6.1 (OSCN 2023); Oklahoma Bar Association Standards of Professionalism, §1.5.

[2] Oklahoma Bar Association Standards of Professionalism, §1.1.

[3]Glenn Gamboa, “Charitable giving in 2022 drops for only the fourth time in 40 years: Giving USA report” (June 20, 2023), https://bit.ly/4eNg7L1.

[4] 26 U.S.C. §§170, 2055.

[5] For detailed research and findings, see BNY Mellon, “Charitable Giving Study,” (March 2022), https://bit.ly/4gQQA5K, and U.S. Trust, “The U.S. Trust Study of the Philanthropic Conversation” (2015), https://bit.ly/3Y4ddMt.

[6] Russell N. James, “Phrasing the Charitable Bequest Inquiry,” 27 Voluntas 998 (2016).

[7] Id.

[8] Id.

[9] Cabinet Office Behavioral Insights Team, “Applying Behavioral Insights to Charitable Giving,” https://bit.ly/3BCQQ7Y (last visited Dec. 6, 2023).

[10] I.R.C. §4966(d)(2).

[11] Rule 2.1, Oklahoma Rules of Professional Conduct, 5 O.S. § Rule 2.1 (OSCN 2023). C

[12] Association of Fundraising Professionals, “The Donor Bill of Rights,” §7, https://afpglobal.org/donor-bill-rights (last visited Dec. 6, 2023).

[13] BNY Mellon, “Charitable Giving Study,” (March 2022), https://bit.ly/4gQQA5K.

[14] 60 O.S. §300.11 et seq. (OSCN 2023).

[15] Rule 1.6, Oklahoma Rules of Professional Conduct, 5 O.S. § Rule 1.6 (OSCN 2023).

[16] Tax Cuts and Jobs Act, Pub. L. No. 115-97, 131 Stat. 2054, 2091 (2017).

[17] Id.

[18] I.R.C. §§2522 (gift tax), 2055 (estate tax).

[19] 60 O.S. ​§301.1 et seq. (OSCN 2023).

[20] Id.

[21] Id.

 

 


Originally published in the Oklahoma Bar JournalOBJ 95 No. 9 (November 2024)

Statements or opinions expressed in the Oklahoma Bar Journal are those of the authors and do not necessarily reflect those of the Oklahoma Bar Association, its officers, Board of Governors, Board of Editors or staff.