Before Writing Charities into Your Will, Check How They Spend Your Money

Worthy nonprofits rely on the big hearts and generous gifts of their donors.  Unfortunately, there are plenty of unscrupulous nonprofits that use donations to line their owners’ pockets.

The Federal Trade Commission outlined one of the biggest shams in history earlier this year, charging four agencies with fleecing donors for $187 million.  The Commission alleges that the agencies claimed donations were helping buy pain medicine, hospice care and other services for cancer patients including children and women with breast cancer.  In fact, the Commission said the money really went toward execs' cars, vacations, tickets to sporting events and other luxuries.  Two of the agencies have closed down and won't re-open.

How do they pull it off?  And how can you make sure your hard-earned dollars get to those truly in need?

How to tell the saints from the sinners

One thing the allegedly fraudulent agencies counted on was that donors weren't paying attention to details.  They gave their enterprises names that sounded very similar to well-known and respected cancer foundations.

Watchdog groups that keep an eye on nonprofits eventually noticed the imposters.  But hundreds of thousands of people unwittingly donated money to these thieving organizations before anyone noticed.  The lesson is simple: screen agencies you support before signing those checks.

Several watchdog groups that are themselves nonprofits offer abundant help with the process.

The aptly-named Charity Watch, for instance, publishes executive salaries and all the names under which each agency operates.  It gives each organization a grade from A+ to F, and it breaks down agencies' spending on fundraising.  For example, the National Urban League received an 'A' rating.  It spends $13 on every $100 it raises, and spends a modest 18 percent of its donations on overhead.

Charity Watch had given an “F” to one of the agencies charged by the feds, The Breast Cancer Society – aka Hope Supply Program and Breast Cancer Society of America – noting that the Society spent $84 for every $100 it brought in, and spent 89 percent of donations on overhead.  On the other hand, Charity Watch gave very good marks to the similar-sounding Breast Cancer Fund and Breast Cancer Research Foundation.      

Avoid Scams When Putting Charities in Your WillGuidestar is another service and you can join for free.  It offers in-depth data on every nonprofit registered with the IRS.  Let's say you want to know more before planning to leave a legacy gift to Los Angeles Regional Food Bank.  Type the name in Guidestar's search box and you will see revenues and assets, how much is spent on programs versus staff salaries, and more.   

What's the best way to leave money to charity?

Finance adviser Merrill Lynch has predicted that charitable giving is about to skyrocket, with baby boomers retiring and leaving money in their wills.  The firm did a study that identified an $8 trillion “Longevity Bonus,” a term that refers to the growing numbers of retirees in America who are living longer and are giving at a greater rate.

Indeed, 2014 was a record year for giving according to the Chicago-based Giving USA Foundation.  It found that donations totaled more than $358 billion, 7.1 percent greater than in 2013, and that individuals – not corporations – were behind the jump in giving.

But how and when are people allocating those dollars?  Are they reaping the tax benefits of their generosity?

A Moneywatch report from CBS found that 25 percent of all charity donations are given in the last six weeks of the year, partially in response to holiday season requests for charity, but also because people want to take advantage of tax deductions before the end of the year.  You may deduct certain gifts if you itemize on your annual tax return.  The IRS allows deductions only if a charity is a qualified organization.

Interestingly, many people who give regularly during their lifetime aren't creating charitable estate plans that give through bequests in their wills.  A study that tracked 20,000 Americans over the age of 50 from 1995 to 2006 found that among people who donate $500 a year or more to charity, fewer than 9.5 percent had a charitable estate plan.

That isn't necessarily a bad thing, as long as they are intentionally omitting charitable estate planning because they prefer the full tax credit that comes with annual giving during their lifetime.

Of course, many people opt for a mix of donating – both during their lifetime as well as after death.  The aim is to plan mindfully, and research the full tax implications of your legacy charity.

Ways to give after you're gone

Since giving through bequests requires advance planning, those who create charitable estate plans typically give more consideration to the importance of a particular organization's mission, one review found.  These givers, more than year-end donors, weigh their gifts' longterm benefit to society.  AARP offers a helpful workbook for anyone trying to determine which agency deserves their legacy gift.

Financial advantages of leaving gifts through a will include reducing the size of – and consequent taxes on – your estate.  Adding bequests also saves your heirs from having to guess at how you would want donations disbursed after your death.  You can elect to have a portion of your estate, or select pieces of property or dollar amounts, bequeathed to specific charities through codicils or will amendments.

One way to give while also cutting taxes on assets you leave to family and other heirs is to create a charitable lead trust.  In this arrangement, you donate part of the trust income to a charity after your death for a specific period of time.  That gives them regular income they know they can rely on for a time.  Then, at the end of the term, the trust remainder goes to beneficiaries.

If you set up a charitable lead trust during your lifetime, you can get a federal income tax deduction equivalent to the trust's future income.  (Of course, you will be taxed yearly on the income's interest.) Or, you can state in your last will that a charitable lead trust be set up at death, allowing your estate to claim a tax deduction.

Donor-advised funds are yet another vehicle for minimizing tax consequences while the donor is still living.  They allow you to earmark money for charity that can be allocated at a later time but which reduces income taxes, especially helpful in high-earning years.  In some cases, the recipient agency will allow you to designate a successor who would handle grant decisions upon your death.

Input from your accountant or attorney can help in making decisions on and creating charitable lead trusts and other legacy giving.  The essential thing to remember is that designating charitable donations now will eliminate potential probate issues and negative tax consequences after your death.

Related Reading:

Estate Taxes: A Beginner's Guide to Minimizing Tax Burden

7 Common Estate Planning Mistakes to Avoid

Intestate: How Dying without a Will Creates a Family Legal Nightmare