An Estate Note: What it is and how it works

One planned giving vehicle that you don’t heard too much about is the estate note.  It is a simple concept with far-reaching implications.  The estate note, put simply, is a pledge against the estate of the donor.  It is irrevocable.  During the donor’s lifetime he or she signs a document stating that upon death, or the death of donor’s survivor, the estate will pay whatever amount was designated.  As part of the agreement, any gifts that are made by the donor while he or she is living can be subtracted from the note if so stated in writing.  The donor, the charity and two witnesses sign it.  The tricky aspect of this means of planned giving is what constitutes the estate.  This will vary from state to state.  In Ohio, for instance, trusts are not considered part of the probate process.  In other states, they are.

How an estate note works

John, who is 83, a widower, and has two grown children, is being approached by his favorite charity to make a six-figure gift.  If he makes that gift outright, he is worried about the consequences of his cash flow.  The charity has made known all the advantages to John including naming opportunities, recognition, donor events, and more.  He still is very concerned about outliving his financial resources.  By signing the estate note for $500,000 he is able make the gift, not hurt his cash flow and, because it is irrevocable, still receive the benefits of a naming opportunity and recognition.  During John’s lifetime he makes $100,000 worth of contributions and states in writing that these contributions are to be used toward his estate note.  When John passes on, his estate is now obligated to pay $400,000.

Advantages and disadvantages to the donor

The estate note provides a number of advantages to the donor:

  • Because it is irrevocable, recognition is possible
  • Does not decrease cash flow
  • Assists with taxes due on the estate
  • Can be decreased by gifts made during lifetime

It also provides a disadvantage if the donor has left his estate to individuals:

  • Decreases the amount the beneficiaries will receive
  • No immediate tax deduction
  • Only one charity can be named
Advantages and disadvantages to the charity

The estate note helps the charity in receiving a gift, in most cases larger than they would have by seeking an outright contribution.  Because it is irrevocable, it provides the charity with the opportunity to recognize a donor and build momentum.  If there is a trust involved, verbiage can be instituted that states the trust will meet the obligation.

The biggest disadvantage to the charity is taking the chance that there will not be enough left in the estate when it comes time for the note to be paid.  Then a decision has to be made about the naming opportunity.

Also, there may be questions from disgruntled heirs about the nature of the gift.

When to use the estate note

As with any planned gift, an estate note should be used when it is advantageous to the donor as well as to the charity.  It may not be a choice for younger donors or donors that want to leave everything to their children.  It has been a good choice for older donors.

As with any planned gift, consulting a professional adviser is highly recommended.  You will need the advice of an experienced attorney and your financial planner.  Also make certain what charities you truly want your estate to support.


Dennis E. Purdy is the director of development with Ingham Regional Healthcare Foundation.  He has spent 15 years helping donors decide what planned gift is right for them.

 

 

 

 

 

 

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