Many donors find charitable beneficiary designations to be a simple way to make a significant legacy gift—one that bypasses probate, costs nothing now, and allows changes to the gift if circumstances change. While this seems like the easiest possible gift, there are still a few pitfalls. Make sure your donors understand and avoid these common mistakes to accomplish a powerful gift that meets their philanthropic intentions.
1. Misnaming the charitable beneficiary
Many charities have similar names. To avoid confusion or a misdirected gift, remind donors to use your organization’s proper legal name, address, and tax identification number when filling out a Change of Beneficiary form.
2. Failing to tell anyone about the gift
When a donor passes away, a life insurance company or retirement plan administrator is generally not responsible for informing your organization of a gift. A charitable beneficiary designation that is kept private, then, runs the risk of going unclaimed or undistributed. Encourage donors to inform you of these future gifts (or, at the very least, inform their attorney or family members). You may even consider adding a gift intention form on your website or simple steps to notify you of the designation. When donors do share their plans, you gain the opportunity to thank them for their generosity.
3. Omitting spousal consent
In most instances, spousal consent is not needed for a charitable beneficiary designation. However, in certain situations—such as in community property or marital property states or with qualified retirement accounts—spouses may have legal rights that could affect the gift. To ensure that the gift will be honored and properly executed, donors should consult their advisors.
4. Designating a specific dollar amount
Donors should generally designate gifts using a percentage instead of a specific dollar amount. Problems can arise if the value of the assets changes significantly—perhaps not leaving enough to cover specified amounts. For example, if the account decreases substantially (through loans, withdrawals, or investment losses), the gift may not have the intended impact. Recommend that donors allocate percentages to all beneficiaries to ensure that gifts will be fulfilled as intended.
5. Listing an estate as the beneficiary
Donors sometimes choose to list their estate as the designated beneficiary and use bequests to make gifts. However, this strategy may result in diminished gift amounts (due to taxes and probate fees) and a slower distribution process. If a supporter wants to make a future gift and they can do so using a beneficiary designation, encourage that direct approach.
Bonus item: Overlooking useful assets
While not necessarily a pitfall, it helps to remember that many supporters only think about life insurance policies and retirement accounts when they consider a charitable beneficiary designation. You may want to note that they can often name a charitable beneficiary on a donor-advised fund. In addition, they can accomplish the same type of gift with a payable on death designation (for bank accounts) or a transfer on death designation (for stocks, mutual funds, or, in some states, real estate).
While creating a charitable beneficiary designation is an easy process, it still requires some thought and care to ensure a successful gift. Remember that many donors may be unaware of some or all of these potential pitfalls and be sure to work them into conversations and messaging to increase awareness.
