On-again/off-again relationships can be fascinating to watch as long as you aren’t a part of the ride. Cheers, the award-winning TV show, featured one of the most celebrated on-again/off-again relationships between bartender Sam Malone and waitress Diane Chambers. Audiences laughed at their banter, identified with their romantic frustration, and shared their heartache—whether Sam left Diane or Diane left Sam. Over the years, Sam and Diane’s relationship cooled to make room for other characters and story arcs. Still, for viewers who lived with their own on-again/off-again relationships, Sam and Diane remained a cultural touchstone long after their storyline faded.
When we think about on-again/off-again relationships, we usually think about romance, but these relationships can also apply to charitable giving. Consider a donor who is passionately committed to making a gift to benefit a much-loved charity until, at some point in the future, something changes. When a donor makes a traditional, irrevocable gift, there is nothing the donor can do to alter the gift. However, when the donor makes a revocable gift, it is possible to change the gift to reflect the donor’s changing needs or objectives.
In this issue of CHARITABLE GIVING, we look at the process and challenges of revocable charitable gifts, including:
No celebrity couple exemplifies the on-again/off-again relationship better than Elizabeth Taylor and Richard Burton. The two met on the set of Cleopatra in the early 1960s and began a tempestuous romance that captivated the attention of paparazzi and fans around the globe. They were already married to others when they met, but both divorced their respective spouses so they could be together. In the years that followed, the couple married, divorced, remarried, and divorced again. With each divorce came rumors of reconciliation, and for good reason—Taylor and Burton seemed fated to be together and were drawn to each other until Burton died in 1984.
For donors who want the option to change their minds as often as Taylor and Burton did, there is no more “classic” revocable gift than a charitable bequest in a will. A will is the foundation of most estate plans—a legal document created by a testator under the laws of his or her state of residence.
A will primarily directs the distribution of the assets in the decedent’s estate. The testator uses a bequest to transfer specific property (money, stock, jewelry, artworks, and so on) to an individual or to charity. For many testators, a charitable bequest is a key component of their estate plan—a way to benefit a favorite cause or organization, honor an alma mater, or further the work of a religious institution.
The charitable bequest is a tremendous tool that provides donors with an easy, flexible way to make an impact by designating that one or more meaningful organizations or institutions receive:
A testator can include a bequest when the will is created or make a gift later by adding a codicil to the will. The testator can also invalidate the will simply by creating a new one, at which point the testator must decide whether to include the original bequest in the new will.
NOTE: It is usually beneficial for estate planning professionals to proactively ask clients about their charitable intentions as part of the will preparation process. Clients often focus on heirs and forget (or do not know) that they can include a charitable bequest. In addition, professionals can help testators avoid errors in bequest language and execution that can jeopardize an estate tax charitable deduction.
If a will is considered the primary estate planning tool, a trust is not far behind. A trust is a legal entity under state law that holds property transferred by the grantor (the person who created the trust) and directs the distribution of property according to the grantor’s wishes. The grantor selects one or more trustees to manage the trust property for the benefit of the trust’s named beneficiaries. A trust provides the grantor with a degree of control that simply is not possible with a will.
The Five Basic Elements of a Trust
•Grantor—The individual who sets up the trust by transferring assets to a third party.
•Trustee—The individual, corporation, or bank that keeps legal title, possession, and control over the trust property.
•Trust Property—Otherwise known as the “corpus,” this may include anything capable of being legally owned, from real or personal property to a contract right (such as a life insurance policy).
•Beneficiaries—One or more named recipients of the trust income and corpus.
•Trust Terms—The instructions directing the trustee as to specific duties and distribution requirements.
A trust can be either revocable or irrevocable, depending on the terms of the trust agreement as determined by the grantor and as drafted by the grantor’s legal counsel.
•A revocable trust (also known as a living trust, revocable living trust, or inter vivos trust) is extremely flexible, allowing the grantor to make changes to trust terms or property or to revoke the trust entirely during life. The trust only becomes irrevocable at the grantor’s death.
•An irrevocable trust cannot be changed—at the time of creation, the grantor surrenders all ownership rights to the trust property.
The most prominent trusts used for charitable giving purposes are irrevocable (for example, charitable remainder trusts), but revocable trusts also provide giving options. A gift made through a revocable trust is like a bequest in a will—the grantor can modify or even remove the gift if circumstances change, but the gift becomes irrevocable at the grantor’s death. A charitable gift in a revocable trust requires the same diligence and care as a bequest, along with a similar level of additional documentation, follow-up, and communication.
For donors who value flexibility, viewing revocable charitable gifts only in terms of estate planning documents would be a mistake. There is another easy, revocable option—naming the charity as the beneficiary of a life insurance policy or financial account. These gifts bypass the probate process and go directly to the charity, which typically means the charity receives a beneficiary gift much sooner than a gift made through a will.
A donor might consider using a beneficiary designation to make a gift with a:
NOTE: There are good reasons for clients to use retirement assets to make a charitable gift, including a decreased tax burden on heirs. However, qualified plan owners must take care when naming a non-spouse beneficiary, as written spousal consent is often required under federal and/or state law.i
Using this type of revocable gift is a straightforward way to donate certain assets by simply designating the charity as the beneficiary on forms provided by the insurer, bank, or retirement account custodian. Donors must be sure to identify the charity using the organization’s proper name, address, and tax ID number. Like bequests and revocable trusts, a beneficiary designation is easy to update if the donor’s needs change.
Of course, donors should understand that the beneficiary designation controls the distribution of the policy or account, even in the face of conflicting distribution instructions found in the donor’s will or trust. Any instructions left in a will or trust regarding these items will have no effect if the asset is not left to the estate or the trust.ii
Whether it is a fictional couple like Ross and Rachel from the TV show Friends, a real-life couple (or former couple) like Justin Beiber and Selena Gomez, or a sports star like LeBron James and his relationship to the city of Cleveland, most people understand the dynamics of on-again/off-again relationships. People involved in these relationships put up with the painful parts for many reasons, but first among them is often the potential for what might be.
This same sense of potential applies to revocable charitable gifts. Even though the donor may revoke the gift, most donors do not. In fact, revocable gifts are most often delivered as promised, fulfilling the donor’s desire to make a difference and providing a much-needed benefit to the charity. However, preserving the option to make a change, if necessary, relieves stress on donors who worry about an uncertain future.