Charitable Bequests in Your Will

You can make a charitable bequest in your will – which means that the charity of your choice will receive your charitable donation upon your death similar to how the other beneficiaries in your will receive their inheritances. Normally, a donation can only generate a credit for your taxes up to 75% of your income for the year – but an exception arises when a charitable bequest is made upon your death – in this case, you are allowed to make a donation equivalent to 100% of your net income in the year of death. Additionally, if it is advantageous to do so, you can also carry back donations to the immediately preceding tax year and claim a donation of up to 100% of your net income for that year as well. (Your personal representative will have to amend your prior tax returns if you had already filed the last year’s return.)

So for example let’s assume our investor Andreas earns $100,000 per year and dies half way through his final year. Let’s assume that he has a $150,000 bequest made to charity upon his death. He will be able to claim a donation to charity of $50,000 on his terminal return and carry back the additional $100,000 to the year prior. He will have completely offset all income tax paid for the last two calendar years which might free up $40,000 in tax savings that could additionally go to either charity or any other beneficiaries.

Note that it is possible to donate more than the 75% or 100% limits described above – you just won’t generate any tax credits for doing so. We will address some planning strategies around this in an upcoming post.