Pastors spend their ministry lives caring for the well-being of others through all the highs and lows of life. As the demands of ministry and life in general compound upon one another over time, it can be easy for the tyranny of the urgent to overshadow planning for the future, both for your church but also for your family. One of the areas pastors often overlook is their own personal estate planning.
What is Estate Planning?
As a general matter, estate planning for pastors has the same objective as it would for anyone, whether in the ministry or not: it is a thoughtful plan establishing the mechanisms of how you want your assets will be transferred upon your death. Wills, trusts, and power of attorney are a few of the tools for effectuating such a transfer. These documents, most commonly referred to as estate planning, act like vehicles to transfer your property upon your death.
There are a variety of reasons why you should consider estate planning, first and foremost being that thoughtful and careful planning can be a tremendous benefit for your spouse, kids, and grandkids you leave behind. Estate plans, no matter the size, can take care of funeral expenses, mortgage payments, college tuition, and other steep costs to better support your family financially. Another primary objective in estate planning is to minimize the probate process (where your estate, which includes all your property, must go through a court process) and avoid the expense and time that a probate process necessarily requires as a well-drafted will and supporting documents can help your family essentially bypass a court process to make the probate process more efficient.
Another key aspect of estate planning is adopting advanced directives. These documents provide direction to medical providers and financial institutions as to your wishes if you are unable to make decisions on your own. Establishing advance directives, especially regarding your medical care and end-of-life decisions, is incredibly important to consider, if not so that your wishes will be carried out but also for your family. An advance directive is a gift to your loved ones who could very well be responsible for making a difficult health decision for you; knowing exactly what you desire will provide them great comfort and alleviate potential familial disagreement, regret, and additional pain, by knowing they are simply carrying out your wishes for your healthcare decisions.
Why should pastors be concerned about estate planning?
While the mechanisms of transferring your property are typically the same regardless of an individual’s vocation, there are additional and unique circumstances that must be considered when estate planning for someone in vocational ministry, including consideration of your housing allowance, implications of social security and Medicare opt-out, as well as unique financial situations such as parsonages. All these concerns can be addressed with a combination of proper estate planning and retirement planning. Retirement planning pairs with estate planning by addressing the needs of both the pastor and the church. For information about retirement planning for pastors, contact us. For now, let’s dive deeper into some of the unique considerations of estate planning for pastors.
What are the unique issues pastors encounter in estate planning?
In our years of serving the local church, we have identified the following areas of estate planning that most frequently arise for pastors.
1. Unique financial circumstances.
A common misconception many pastors hold is that estate planning is only for the super wealthy. This could not be further from the truth. No matter the size of the estate or the financial circumstances of the pastor, an estate plan is vital to ensuring clarity for family as to the gifting of different assets. Assets like a house, a car, or a significant collection of theological works all have value and establishing who receives such items is crucial to avoiding interfamily division. Also, an estate plan can help avoid the huge costs associated with probate or other potential legal action if properly written. An estate plan also allows for pastors to give special significant items to family or friends. For example, if a pastor wrote a book or composed music, the royalties and payments can be designated to the spouse or specific family members within the estate plan. Royalties of this nature can potentially help offset the costs of funeral arrangements or even go towards a mortgage or other debt. But if not properly specified within an estate plan, the royalty payments would pass through probate, which could take months or years to access. An estate plan avoids that type of mess and clearly allows the executor of a will or trustee of a trust to disperse the assets in accordance with your wishes upon death.
2. Housing Allowance & Parsonages.
The housing allowance tax benefit is a great financial blessing for pastors and should be appropriately established annually through your church’s governing body. The housing allowance amount will be designated as nontaxable income to the pastor and typically will terminate upon a pastor’s retirement. However, there is a way through proper estate planning to extend this benefit. The IRS allows for a retired pastor to designate a portion of their 403(b) retirement distributions or denominational pension fund for housing expenses. That designated portion, if it is a legitimate housing expense, will not count towards the pastor’s gross income and will reduce the overall taxable income of the retired pastor. Pastors should discuss the move-in and move-out requirements with the church to better understand when a parsonage may need to be vacated. It is important to discuss housing far in advance of retirement if the church provides a parsonage.
3. Social Security/Medicare.
Although fewer pastors are deciding to opt out of Social Security and Medicare, if you previously opted out of Social Security and Medicare taxes by timely filing Form 4361, it is crucial to plan for the tax consequences of this decision within your estate plan. Although the extra monthly income resulting from the opt-out may be temporary boost to your finances, it can have a serious effect on your finances once retirement comes. Too often, pastors have good intentions of saving the opt-out funds for the future, but daily realities quickly take over and too often pastors fail to save for the future. We encourage pastors at every stage of their career to make a plan and save accordingly to ensure that your retirement and subsequent estate are funded. Setting aside a certain portion of your income in savings or in investment accounts while still working full time ministry will help offset any medical costs for retirement, which will have to be paid out of pocket. Additionally, having assets like a life insurance plan (discussed below) may be able to reduce or cover the overall costs for end-of-life care or any major medical bills.
4. Life Insurance
A life insurance plan may have already been purchased by your church to cover you as a leader of your church. This policy, typically called a “key man” insurance policy will help the church financially in the event of your sudden death or illness that leaves you unable to perform your normal duties. Carefully examine the key man insurance policy coverage to ensure you and your board understand the coverage limits. However, you should understand the limits of the key-man policy: it will provide financially for the church but not for your family individually. Therefore, it is important for you obtain a separate individual life insurance policy where your spouse or children will be the named beneficiaries. We recommend pastors obtain their own life insurance policy even if the church offers a life insurance policy as part of your compensation or as part of your retirement package; while these will be helpful, they are unlikely to provide as high a death proceeds as you would desire. Obtaining your own separate and personal life insurance policy will help cover the costs of death, burial and service, and any accompanying medical costs as well. The life insurance policy will help alleviate the financial burden on your family. Shop different plans to find the best fit for your needs including monthly payment and total payout upon redemption.
5. Gifts.
Occasionally, and usually at retirement, churches want to give a large lump sum gift to their pastor as a sign of their appreciation. You need to be aware that such a gift may create tax consequences for the church and for you personally.
If a large gift is contemplated whether upon the retirement of a pastor or to the family upon the pastor’s death, the church should speak to financial and legal counsel before making such a gift to avoid undesired tax consequences.
VI. Conclusion
No matter the size of a pastor’s personal assets or the size of the church they serve, it is vitally important for a pastor to consider forming their estate plan well before it is needed. The benefit and assurance of knowing who is receiving what and the security that brings to your loved ones can help eliminate many of the awkward and chaotic situations that can ensue for the families of pastors and the congregations they lead. Clarity is kindness and bringing clarity to this portion of a pastor’s ministry is crucial for demonstrating good stewardship and cementing a pastor’s legacy for their family and the congregation they helped steward.
Our desire is for pastors to be confident in knowing the people they love most will be cared for and a meaningful and kind way to do this is to think about your estate planning today.
VII. Additional resources
If you would like help navigating estate planning, The Nonprofit Team is here to help. We have been working with pastors for over twenty years and we would love to walk alongside you through the process. We offer free consultations, and we charge a flat fee for our estate planning services so you will never be caught off guard by a large legal bill. Contact us. We look forward to hearing from you, and we hope this article was helpful.
The information provided in this article does not, and is not intended to, constitute legal advice or investment advice; instead, all information, content, and materials available in this article are for general informational purposes only. Information contained in this article may not constitute the most up-to-date legal or other information. This article contains links to other third-party websites. Such links are only for the convenience of the reader, user, or browser; the author does not recommend or endorse the contents of the third-party sites.
Readers of this article should contact their attorney to obtain advice with respect to any particular legal matter.
Anthony & Sparkman, PLLC is a law firm located in both Dallas/Fort Worth and Georgetown, Texas that provides legal counsel to both churches and nonprofits around the world. John Anthony & Michele Sparkman have spent over a decade providing general counsel to churches and nonprofits on issues ranging from incorporations, governance, employment, policies and procedures, taxes, succession planning, real estate development, and much more. For more information visit our website at www.thenonprofitteam.com.
