Why Bequests Are Bad Planning for Donors and Charities
The recent Giving USA 2026: Annual Report on Philanthropy found that American charitable giving reached a record $617 billion, but each year, less of that money comes from small (living) donors. Instead, donations via bequest surged over 17% during the past year, the largest increase of any major source of giving. A bequest is a gift of personal property, money or assets left to an individual, organization or cause through a will or trust. Often referred to as a legacy, this transfer of ownership is legally arranged by a testator but becomes effective only after their passing.
According to researchers, the increased use of bequests (now totaling $62 billion) suggests that planned giving may be entering a more active phase as older donors transfer wealth to heirs and charities. In fact, the data show it was the third time in four years that bequests have grown at or above 20% in current dollars.
To me, the rise in bequests might be a sign of bad planning. Increasingly, charitable giving is being driven by the deceased rather than the living. Why are donors and their advisors waiting until death to support the causes and organizations they believed in? Why didn’t they give earlier and benefit from their giving, both taxwise and psychologically, while still alive?
If you talk to planned giving professionals, you’ll find the only gift they think about is a bequest. This is often because bequests are very simple and non-threatening. They require very little explanation, no financial calculations and no new trusts. The donor’s life doesn’t change one bit.
That deprives donors of the ability to take advantage of a lifetime income tax deduction, avoid capital gains tax and receive income from the asset while they’re alive, like the interim gifts I use all the time.
To me, the rise in bequests means more people are structuring wills so that assets don’t leave their estate and go to charity until they die. That’s not great for tax planning and lifestyle planning for the donor, and charities have to wait patiently until the donor dies before they can put that money to work for their mission.
Younger Donors?
There’s been a lot of talk lately about Gen Z and millennials being more generous than older generations. I’m not sure if that’s true, but many charities are hoping they’ll benefit from young people receiving windfalls from tech IPOs, baby boomer inheritances and other sources. But trust me, even from an estate-planning perspective, it’s tough to convince a 35- or 40-year-old who has a ton of money to create an irrevocable trust to move assets outside their estate.
Some of that reluctance comes from the money messages they received growing up. But younger generations are very busy working hard to create their next opportunity in an uncertain job market. They’re holding on to as much cash as possible to pay off student loans, start a business or start a family amid record-high housing prices and childcare costs. prices. In fact, a New York Times report found one-third of U.S. adults under age 35 are still living with their parents, even though 70% are fully employed, often with college degrees. The rate is over 40% in high-cost metro areas.
Charitable giving often isn’t a priority for many people unless they grew up in a philanthropic family or belong to a charitably inclined house of worship. That said, the proportion of young people who are wealthy or on track to be wealthy is also rising. According to YouGov Profiles, 18% of 25 to 34-year-olds earn 6-figure incomes, as do 25% of 35 to 44-year-olds. That’s an enormous market for financial advisors to tap, both for financial planning services and charitable giving strategies, since many of those high-paying jobs are concentrated in high-cost, high-tax areas of the country.
Now’s the time for advisors to start having conversations with high-earning or potentially high-earning younger clients. Even if the clients haven’t brought up giving directly, advisors can start the dialogue by saying: “Here are the numbers the way you’re going and here are the numbers with tax-advantaged giving in the mix. Let’s look ahead for 25 years and compare the outcome with giving in your plan vs. the outcome without giving in your plan, i.e., you have half as much money. Which would you prefer?”
Older Donors
Meanwhile, more retirees and near-retirees are expected to be coming into a windfall near-term due to business exits and inheritance. For instance, roughly 6 million small and medium-sized businesses are expected to change hands over the next decade as Boomers move into retirement, according to the McKinsey Institute for Economic Mobility. And what’s the one thing every business owner hates? Income tax. Then they go sell their business without any tax or estate planning in place, which means a disproportionate share of the proceeds goes to Washington, rather than to their families or the causes and organizations they support.
Real World Example
One of our clients, who is divorced and retired, worked at Apple Computer for his entire career. He has amassed $80 million worth of Apple stock with a very low basis. The stock pays only a tiny dividend, and our client needs cash flow for his retirement. He claims to be very charitable, but using a bequest to give to his favorite charity when he dies is an entirely wasted opportunity. Instead, we can fund a charitable remainder trust with $20 million of Apple stock, receive a $10.2 million charitable income tax deduction and receive $1 million per year in income.
When our client finally passes away, there’s likely to be more than $20 million left for charity (if he invests at a rate greater than his 5% payout). We solved his cash flow issues, reduced his income taxes by creating a charitable deduction, and still left a large (pre-funded) bequest to charity. It makes waiting until death seem silly.
Advisors shouldn’t buy into the argument that helping clients with philanthropy means fewer assets for them to manage. In all the planned giving vehicles I use, including pooled income funds, charitable remainder trusts and charitable lead trusts, advisors continue managing the money in almost every case. In fact, they often get to take care of multiple generations of the family with those assets. These are just planning questions.
