Charitable Bequest

A charitable bequest is a transfer to a qualifying charity that takes effect at the donor's death, arranged through a will, a revocable trust, or a beneficiary designation on an account or policy. It is the death-time counterpart to lifetime charitable giving. Its defining tax feature is that it is deductible against the estate rather than against income: under Internal Revenue Code section 2055 the estate-tax charitable deduction has no dollar or percentage ceiling, so a charitable bequest of any size removes that amount from the taxable estate.

The appeal of a bequest is that it costs the donor nothing during life. Someone who wants to support a cause but cannot afford to give away principal now can name the charity to receive assets later, keeping full control and use of the money while alive and directing it only at death. The tradeoff is the mirror image: because nothing leaves the donor's hands during life, a bequest produces no income-tax deduction for the donor. The deduction it does produce belongs to the estate, reducing the taxable estate under section 2055, which matters for estates large enough to owe estate tax and is neutral for those that are not.

Bequests come in standard forms. A specific bequest gives a stated dollar amount or a particular asset ("$50,000 to the food bank," "my shares of X to the museum"). A residuary bequest gives all or a percentage of what remains after debts, expenses, and specific gifts are satisfied, which keeps pace with the size of the estate rather than fixing a number that may be too large or too small by the time of death. A contingent bequest takes effect only if named individuals do not survive, a common backstop. Any of these can be written into a will or a living trust, or accomplished outside probate by naming the charity as a beneficiary.

The most tax-efficient asset to leave to charity is often a traditional retirement account. Money in a traditional IRA or 401(k) is income in respect of a decedent: an individual heir who inherits it owes ordinary income tax as they withdraw it. A charity, being tax-exempt, takes the same account free of income tax. So a donor who plans to give to both heirs and charity generally does best to leave the retirement account to the charity and other assets to the heirs, which is done by beneficiary designation rather than by will. A bequest of a remainder interest with an income stream to family is a different instrument entirely, a charitable remainder trust, covered on its own page.

A charitable bequest works by directing an asset to charity at death and claiming the estate-tax charitable deduction for it.

Consider a hypothetical estate of $6,000,000 whose owner leaves a $500,000 residuary bequest to a qualifying charity and the rest to family. For estate-tax purposes, the $500,000 charitable gift is fully deductible under section 2055 with no ceiling, so the taxable estate is reduced by the entire $500,000. The donor received no income-tax deduction during life, because the gift was never a lifetime contribution. Now compare the asset choice: if $100,000 of that gift is funded from a traditional IRA left directly to the charity, the charity receives the full $100,000 with no income tax, whereas a child inheriting the same IRA would owe ordinary income tax on every dollar withdrawn. Same $100,000 on paper, very different after-tax result depending on who receives which asset.

Pros

• Costs nothing during life; the donor keeps full use and control of the assets until death.
• The estate-tax charitable deduction is unlimited, so a bequest of any size fully leaves the taxable estate.
• Flexible in form (specific, residuary, or contingent) and revocable, so it can be changed as circumstances do.
• Leaving a traditional retirement account to charity avoids the income tax an individual heir would owe.

Cons

• Produces no income-tax deduction for the donor, unlike a lifetime gift.
• The donor never sees the impact of the gift, and priorities can change before it is ever delivered.
• A fixed specific bequest can become disproportionate if the estate shrinks or grows before death.
• Requires up-to-date documents; an outdated will or beneficiary form can send the gift somewhere unintended.