You are likely well aware of the tax benefits that come from donating to charity during your lifetime—donations to charity are tax-deductible. But you may be surprised to learn about the numerous benefits that are available when you incorporate charitable giving into your estate plan. As with donating to charity during your lifetime, dedicating a portion of your estate to a charitable cause can reduce the taxable value of your estate. You can also receive significant tax savings by naming your favorite charity as the beneficiary of your IRA, 401(k), or other retirement accounts. And if you have highly appreciated assets like stock and real estate that you want to sell, you can even set up a special type of charitable trust that can not only help you avoid both income and estate taxes but also create a lifetime income stream for yourself and your family, all while supporting your most beloved charitable cause. While as a Personal Family Lawyer®, we can help you find the most beneficial option for donating to charity via estate planning; here are three of the most popular ways to structure charitable giving into your plan. 1. Leave Money To Charity In Your Will Or Revocable Living Trust One of the simplest ways to donate to charity in your estate plan is to name a charity as the beneficiary in either your will or revocable living trust. Just make certain when you leave money via your will or living trust that you use the correct legal name of the charity, as many charities have very similar names, and if you aren’t specific, the charity may have difficulty accessing the funds. In either your will or living trust, you can also state the purpose for which you’d like the charity to use the funds, or you can make the donation for the charity's “general purpose,” meaning the charity can use the funds as it sees fit. If you choose to leave money for a specific purpose, make sure that the charity can actually fulfill that purpose or the charity might have to refuse the gift. To this end, if your request is really specific, you may want to contact the charity before making the request to see if the organization will be able to fulfill your objective. Keep in mind that if you leave money to charity in your will, your will must first go through the court process of probate, which can be time-consuming, before the organization can access the funds following your passing. Conversely, donations to charity made via a trust would pass to the charity immediately upon your death.
Leaving money to charity in your will or living trust can reduce the taxable value of your estate, thus reducing estate taxes for your heirs. That said, the current federal estate tax exemption is $11.7 million per person, so unless you are super wealthy, you won’t see any tax benefit—at least at the federal level. However, 17 states currently have state estate taxes that kick in at lower exemption amounts, so if you live in one of those states and leave money to charity via your estate plan, your loved ones may be able to benefit from reduced estate taxes at the state level.
2. Name A Charity as the Beneficiary of Your Retirement Account
As with leaving money to charity via your will or living trust, another easy way to incorporate charitable giving into your estate plan is to name a charity as the beneficiary of all or a percentage of your tax-deferred retirement accounts (IRA, 401(k), 403(b), etc.). In addition to supporting a good cause that’s near and dear to your heart, donating your retirement account assets to charity comes with some significant tax-saving benefits. Individuals named as beneficiaries of your retirement account will have to pay income taxes on any distributions they receive from your retirement account. But since charities are tax-exempt, charitable organizations named as beneficiaries will receive the full amount of your retirement account assets. Additionally, though you need to include the value of the retirement account assets as part of the gross value of your estate, you will receive a tax deduction for the charitable contribution, which can offset estate taxes.
Finally, under recent changes to the SECURE Act, most beneficiaries of IRAs now must withdraw all funds from the retirement account within 10 years of the account holder’s death, which eliminates the ability of most individual beneficiaries to stretch out retirement account distributions over time and compresses income tax payments into a much shorter period. Those who fail to withdraw funds within the 10-year window face a 50% tax penalty on the assets remaining in the account.
Yet because charities don't pay income taxes, it may be more beneficial from a tax-saving perspective to leave your retirement assets to charity, while passing on your non-retirement assets to your loved ones. However, the SECURE ACT does offer exemptions to the mandatory 10-year withdrawal rule for certain beneficiaries, including a spouse, minor children, and disabled or chronically ill individuals. Given this, you should consult with us, as your Personal Family Lawyer, to determine the most beneficial option for passing on your retirement account assets.
3. Set Up a Charitable Remainder Trust
One final way to structure charitable giving into your estate plan is by creating a special trust known as a charitable remainder trust (CRT). If you have highly appreciated assets like stock and real estate you wish to sell, you can use a CRT to avoid income and estate taxes—all while creating a lifetime income stream for yourself or your family and supporting your favorite charity. A CRT is a “split-interest” trust, meaning it provides financial benefits to both the charity and a non-charitable beneficiary. With CRTs, the non-charitable beneficiary—you, your child, spouse, or another heir—receives annual income from the trust, and whatever assets “remain” at the end of your lifetime (or a fixed period up to 20 years), pass to the named charity or charities.
When you set up a CRT, you name a trustee, an income beneficiary, and a charitable beneficiary. The trustee will sell, manage, and invest the trust’s assets to produce income that’s paid to you or another beneficiary. The trustee can be yourself, a charity, another person, or a third-party entity. With the CRT set up, you transfer your appreciated assets into the trust, and the trustee sells it. Normally, this would generate capital gains taxes, but instead, you get a charitable deduction for the donation and face no capital gains when the assets are sold. Once the appreciated assets are sold, the proceeds (which haven’t been taxed) are invested to produce income. As long as it remains in the trust, the income isn’t subject to taxes, so you’re earning even more on pre-tax dollars. And when the trust assets finally pass to the charity, that donation won’t be subject to estate or income taxes.
Because CRTs come with very specific and complex requirements surrounding their creation, operation, and the responsibilities of the trustee, it’s vital that you consult with us, your Personal Family Lawyer® if you are considering setting up a CRT. Meanwhile, review our previous post for an in-depth look at how charitable remainder trusts work and the numerous tax-saving and income benefits they offer.
Enlist Our Support
Although these three methods for structuring charitable donations into your estate plan are among the most popular, there may be other options available. Meet with us, as your Personal Family Lawyer®, to determine the best way to achieve your charitable objectives while maximizing your tax-saving and other financial benefits. Schedule an appointment with us today to learn more.
This article is a service of Sarah M. Ventris, Personal Family Lawyer®. We do not just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer a Family Wealth Planning Session™, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.
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