Here are four principles for New York lawyers to keep in mind when working with clients who, at death, want to favor noncharitable beneficiaries besides charitable ones:
Principle 1: Give away traditional IRAs first.
- Why?: Because IRAs given to family members are 100% taxable income to them, while IRAs given to charity are zero income tax to the charity. Giving IRAs to charity leaves more non-IRA assets to pass tax-free to non-charitable parties, such as family.
- Example: Your client has a $900,000 estate composed of $800,000 in cash/real estate and $100,000 in an IRA and wants to leave $100,000 to charity. After income tax, the bequest of $100,000 IRA to the child is worth perhaps
$60,000, but the bequest of the $100,000 IRA to charity is worth $100,000 –undiminished by tax. So, using IRA for charitable bequest nets the child an extra $40,000, while continuing to provide $100,000 to the charity.
Scenario:
$900,000 estate after expenses
1 child
$100,000 IRA
A. If Will or trust leaves $100,000 bequest to charity and $100,000 IRA beneficiary designation to child:
-
- Charity gets the full $100,000 bequest;
- Child gets $700,000 residuary bequest; and
- Child gets IRA of $100,000 less $40,000 income tax or $60,000, so child’s bequest net of tax is $760,000.
B. If IRA beneficiary designation to charity of $100,000 is made:
-
- Charity gets $100,000 IRA (no income tax);
- Child gets $800,000 residuary estate (no income tax);
- So, child bequest net of tax is $800,000.
What’s the “cost” of following this principle? Having to monitor the size of the IRA to see if it still fits with the client’s wishes. If the IRA doubles in size, the client may give more away to charity than he or she wishes. But this is easy enough to fix — just have the client re-do the beneficiary designation for the IRA and leave a smaller fraction to charity (say, 50/50). An advantage of making changes in an IRA for charity is that the client can do this without changing his or her Will.
Roth IRAs, which the client’s non-charitable beneficiaries can take income-tax free, are best not given to charity.
Principle 2: If you make charitable bequests in revocable trust or Will, try to give only pecuniary bequests or specific bequests.
- Why?: If your client leaves a residuary bequest (or the balance of a revocable trust) to charity, you will need to: (a) register the estate or trust with the New York Attorney General’s Office under EPTL 8-1.4 (where registration is needed if a bequest to charity is indefinite — meaning non-pecuniary) or where the charity is not named; and (b) account (most likely judicially) to the charities in the Surrogate’s Court. The Surrogate’s Court is now issuing “limited letters testamentary,” requiring judicial accountings where there is a residuary charitable bequest. Any sign-off/receipt and release by the charity to an Executor’s account is insufficient. There has to be a sign-off or appearance by the Attorney General in the Surrogate’s Court. The costs of a judicial accounting are not to be underestimated, and the attorney is required to submit an affirmation of legal services (which is uncompensated and burdensome) in an accounting proceeding
What’s the cost of following this principle? Monitoring the size of the client’s estate on a periodic basis to make sure that the pecuniary bequest isn’t too big (especially during times of market downturns) or too small (if client’s assets have grown).
Principle 3: If your client has trustworthy children, don’t make any charitable bequests unless the decedent’s estate will owe estate tax.
- Why?: There will be zero tax benefit to a bequest by a client who doesn’t owe estate tax. But, if the client leaves the children a cash bequest (say $100,000) coupled with a provision indicating that while the bequest is absolute and free of trust, the client may leave a letter or memo of guidance as to the further disposition of this sum, then the client, by his or her children, can get money to charity, and the children will get an income tax deduction when they make the gift.Compare this to a $100,000 charitable bequest that produces no tax benefit to the donor or the donor’s family.Once again, though, it helps to have trustworthy children (or friends) who can carry through with the gift intention of your client.
Principle 4: Use charitable gifts and bequests to avoid NY estate tax, but NY Estate Tax savings clauses — also known as “Santa Clauses” — are not automatic cures. By use of a special provision to zero out NY estate taxes within the band that is 105% of the NY Estate Tax exemption of $7,160,000, your client can actually give more assets to the client’s family.
Why?: Once you go over the New York Estate Tax “cliff,” the entire estate becomes subject to New York estate tax, creating an effective marginal rate on the excess that can exceed 100%.
See Excellent NYSBA Journal Article: Marjorie W. Hornaday, Benjamin Millard and Michael S. Schwartz, Are Santa Clauses in Estate Planning Documents Always a Welcome Gift? New York State Bar Ass’n (May 23, 2025), https://nysba.org/are-santa-clauses-in-estate-planning-documents-always-a-welcome-gift/?srsltid=AfmBOoq7dJ38NNKptay05e3BWA0g0gWgLrL7DPa_I6PISSbhLenq5kmq.
A specimen clause suggested by the authors is: “The Trustee shall distribute to one or more charitable organizations described in Sections 2055(a) and 2522(a) of the Internal Revenue Code that the Trustee shall select, taking into account charitable gifts and directions of the Settlor and the Settlor’s spouse, the smallest amount of trust property, if any, that will reduce the New York estate tax that would be imposed on the Settlor’s estate but for the provisions of this paragraph to zero and reduce total applicable taxes by more than the amount of such distribution.”
In the Article, the authors use the example of a $7.4 Million New York taxable estate — which is $240,000 above the exemption (cliff start) of $7,160,000. New York Estate Tax on this excess amount would be ordinarily $564,000: on only $240,000 in assets above the New York exemption, the estate tax of $564,000 is at a marginal rate of 235%!
Use of the Santa Clause therefore saves the noncharitable beneficiaries $324,000 in estate tax (nominal tax of $564,000 less charitable gift under the clause of $240,000 = $324,000) in avoided tax — which goes to beneficiaries.
While the above is good news for the families that qualify, there’s plenty of bad news:
- Complication in use, especially for those who don’t need the clause;
- Disqualified for NYS estate tax alternate valuation;
- Complications with contributions from non-probate bequests or beneficiary designations;
- Interest may be owed on unpaid charitable legacies; and
- (Potentially the largest downside) Attorney General involvement in estate
For clients who are definitely within the New York estate tax cliff, the Santa Clause offers benefit. But for the reasons listed above, the clause is hardly a cure-all and may be at times counterproductive.
A simpler way to deal with the cliff, at least for persons with easily valued assets (cash, stocks and bonds, etc.) may be to look at the value of the client’s estate each year and to adjust the outright pecuniary legacy to charity (or better, IRA beneficiary designation). Estate planning advisors for elderly clients should make sure that the client has a power of attorney in place giving the agent broad gift-making powers, including the power to make gifts to charity.