Including a charity in estate planning
In my practice at Oak Partners, we participate in a lot of estate planning. Estate planning is about much more than wills, trusts, and life insurance. It also involves, as I like to say, “making you look good when you’re gone.”
Now, you might respond, “I’m gone, what does it matter?” But I assure you it does. A well-constructed estate plan, especially in Indiana, where we have very cooperative estate laws, will be clear, concise, and, most of all, as straightforward as possible for the person or organization designated to manage your affairs after you’re gone. In the vast majority of the estate planning I am a party to, this designee is a family member or trusted friend of the family or individual doing the planning.
With this in mind, we have to assume this designee will, at the time of death, be grieving, as well as occupied with their own life and affairs. So the “make it straightforward” part of the process becomes very important. Just trust me: you want to look good when you are gone.
One area where even a well-constructed estate plan can be difficult to administer at death is when a nonprofit charitable organization has been named as beneficiary of a transfer-on-death (TOD) account or an IRA. The difficulty does not come from the intention to use one’s financial legacy to benefit a cause. That intent is kind and generous. It comes from the actual execution of naming a charity this way.
Without going too deep into the weeds: when the owner of an IRA or a non-IRA transfer-on-death account dies, activity on the account is immediately restricted and certain privacy controls are initiated. Any power of attorney on the account, whether granted to a caregiver or family member or to the investment firm providing services to the account owner, ends. No further investment transactions, withdrawals, or deposits are possible in the account.
With an IRA or TOD account, beneficiaries are entitled only to information on their share of the account. Trustee powers and executor powers granted in a will or trust are not pertinent to the beneficiary distribution process. So this raises the question: if a charity is named as a beneficiary of the account, what is the process of actually getting the organization the money?
To be frank, it is not always easy. In the case of a TOD investment account or an IRA, the charity must be located and must agree to open an account to receive the funds. That assumes the financial institution can even find and contact the proper persons within the organization authorized to do so. Once the beneficiary account is open, investments must be moved over in kind, then sold or transferred, and only then does the organization receive the funds. It can be an ordeal.
Where the financial services firm holding the assets is a local investment advisory firm or bank, the process may receive more attention and effort. I do not think funds held at online banks or online investment and custodial platforms will receive the same resolve. With these non-local institutions, getting the money to the intended organization can take a long time, or in some cases not happen at all, while the investments remain subject to market movement and risk. Not good.
At Oak Partners we have developed a potential solution. The workaround is to use what is called a donor-advised fund. A donor-advised fund (DAF) is a charitable account at a sponsoring public charity, such as a community foundation or a financial-services sponsor. Most larger investment firms, including firms in the LPL Financial network, can offer access to a DAF. The DAF lets donors contribute cash, securities, or other assets and receive an immediate tax deduction. Once a contribution is made, the sponsor takes legal control of the assets. The donor then recommends grants to chosen qualified charities, either immediately or over time.
The fund can be invested and grow tax-free while the donor retains advisory privileges, not ownership. A DAF is simpler and cheaper to establish than a private foundation, but grant recommendations are not legally binding, and grants must go to eligible nonprofits.
Where a DAF helps in estate planning is this: the DAF is named as the account beneficiary instead of an individual charity. The investments and cash designated for the DAF move in-house. No organization needs to be found, and no organizational account needs to be opened.
A giving memo is then left with the estate documents, designating a person charged with recommending grants from the DAF to the ultimate intended organizations. That person can be the trustee or executor already working on the estate, or someone else. The giving memo can provide detailed, non-binding instructions on how to grant and use the funds. The organization simply receives a check from the DAF, directed by the granting designee. Straightforward, in-house, and efficient.
If leaving a charitable legacy is part of your estate intentions, give this option a look. And you look good when you’re gone.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. This material may contain forward looking statements; there are no guarantees that these outcomes will come to pass.
Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
