Philanthropic giving can reduce the percentage of Inheritance Tax that must be paid on the estate and is therefore an important part of estate planning.
There are many reasons why the inclusion of philanthropic giving into an estate plan can create financial advantages, not only for the charitable beneficiaries, but also for the owner of the estate and their heirs.
People who are eligible to pay Inheritance Tax can cut this tax bill quite drastically by leaving a percentage of their estate to charity.
Incorporating philanthropic giving into an estate plan can reduce or eliminate liability for paying Inheritance Tax when done according to the proper regulations. Employing the services of a financial adviser or professional estate planner helps to ensure that both the charities and the other beneficiaries of a will are able to make the most of this legacy.
Dr Edgar Paltzer works as an attorney-at-law in Switzerland and counts estate planning among his specialist areas of expertise.
Charitable Giving Tax Benefits
Anyone who has a sizeable estate is in many jurisdictions liable to pay tax on the ‘net’ estate – that is, the value of the estate minus the debts. Any money gifted to a charity in a will is exempt from the taxable value of the estate it comes from.
In most jurisdictions, the percentage of Inheritance Tax that must be paid on a net estate can be reduced if the benefactor chooses to leave money to a charitable cause or causes.
This may mean the beneficiaries end up with slightly less money, but the overall tax bill can be reduced (and a charitable cause can also benefit, rather than the taxman). The specific rules for this can be complex, so it is always worth seeking the advice of a professional.
How to Incorporate Philanthropic Giving in a Will
There are two main ways in which philanthropic giving can be incorporated into a will. The benefactor can specify a charity or charities themselves, or, in some jurisdictions, they can simply specify an amount and allow the decision to be made by the trustees of the will.
Giving to charities through a will may include:
- Donating cash sums;
- Gifting a particular asset or property; or
- Leaving the whole or a share of what is known as the residuary estate (everything left over after costs, tax and specified gifts to other benefactors).
It should be noted that when gifting assets or properties, questions of valuation may arise and that the types of assets you choose to leave to charity may require research and depend on which charity you want to benefit – some are set up to be able to receive and utilise more sophisticated assets such as real estate or privately-held securities, while others may only be able to accept cash sums. Some charities may even refuse to accept objects and properties, if these require maintenance or out-of-pocket expenses.
Specifying Use of the Gift
Some individuals who choose to incorporate philanthropy in their will prefer to be able to specify where and how their legacy will be used. If this is the case, it is best to organise this directly with the charity in question before death to ensure those wishes are reasonable and viable.
There have been previous cases of charities having to return gifts left to them in a will as they are unable to comply with the restrictions or specific conditions regarding how the gift can be used. In this regard, it is therefore again advisable to employ the services of a professional estate planner.