Dear Mr. Miller:
I want to leave a gift in my trust to my alma mater. And gifts to 10 other institutions. Between $20,000 and $50,000. As to my alma mater, I would like it to be used for a scholarship for undergraduate history students who have a grade point average of between 2.25 and 2.75 (the high performing students usually can qualify for scholarships, while the lower performing need them more) and have an Eastern European heritage. I don’t think this will have any effect on taxes as I am well below the current $11.18 million exemption. But what are the in’s and out’s of this?
Wanting to Do Good
Your desire to create a scholarship is admirable. I am sure the university will be happy as scholarship funds on hand are never enough. The issues involved in making the gift when you die (referred to as testamentary gifts) are numerous.
Death & Income Tax: First, the death tax. You are correct, it appears you do not have to worry about this tax. But note that the exemption went up again in 2019. It is so high now that few Americans need to be concerned about it. In fact, I don’t even bother memorizing the amount anymore since it changes every year. It is now $11.4 million. And can be easily doubled between spouses. However, that exemption is scheduled to drop after 2025 to $5.2 million (with an inflation factor running from $5.49 in 2017). Whether the exemption will actually drop to, for most people, still stratospheric amounts, is anyone’s guess. What I can say is that in 40+ years I have never seen it drop.
So is there any tax that can be affected by your gift. Contrary to popular belief, there is no charitable deduction for income tax purposes for an estate based on a gift specified in the Will or Trust. Such a bequest belongs to the charity and giving the organization what they are due does not create a charitable deduction. So the tax deduction is lost. However, if you leave everything to your children, or someone else you trust to carry out your wishes, an income tax deduction can be created. For example, say you have two children and you want them to get everything except the $50,000 for the University. In your Will/Trust you would add a clause that leaves half of everything to each child but with a request, but not a requirement, that they each leave the University $25,000. In this manner, the children will obtain the income tax deduction. Now, what the tax law will be when you die and whether they can use that deduction to their advantage is something that can only be answered at that time.
Scholarship Restrictions: You should work with the University’s planned giving department on your desired restrictions. I can say that the larger the gift the more likely they will be to take the time to craft your somewhat out of the ordinary desires. And as to the Eastern European heritage, you will have to find out if that conflicts with some sort of discrimination law or regulation. Again, the University should be able to assist you with that.
Wording for the Gift: It is important that the provision for the gift be clear. Are there two Universities with deceivingly similar names? You want to make sure you use the official name. And that may be a foundation on behalf of the University and not the University itself. Is there more than one campus such as with the University of California, Los Angeles or Berkeley or the other 8 campuses? Again, you must be specific as to whom you are trying to benefit. The planned giving officer can assist your estate planning attorney with all of that.
How Many Charitable Gifts are Too Many: It may seem like saying thank you with testamentary gifts to every institution that has had an effect on your life is a good thing. But too many gifts can be a problem. First, every institution has administrative costs in receiving and using these gifts. If you decrease the number of gifts and increase the amounts for the remaining gifts, the percentage that the administrative costs absorb is reduced. Second, the more individual gifts that are made, the more complicated the estate. Keep in mind the attorney has to notify and potentially answer questions for each institution. And keep track of each gift to make sure it is sent and received. That takes more time and effort and increases the attorney fees to settle the estate. So less may be more!
Other Approaches: And there may be better approaches to accomplishing your desires. That can only be determined by a complete and detailed consultation with an experienced estate planning attorney and a planned giving officer.