Incorporating Charitable Giving Into Your Estate Plan

With the holiday season upon us, many are starting to plan for annual charitable giving. While charitable giving can be an important part of the holidays, it can also be an important part of an estate plan for those who are charitably inclined. Depending on the extent of the gifts and the financial circumstances of the donor, there are various ways to leave assets to charity in your estate plan.

Incorporating Charitable Giving Into Your Will or Trust

If you want to keep your charitable giving simple, this can be accomplished by writing a bequest to charity in your Will or Trust documents. For instance, your will could contain language that says “Charity X” will receive a certain amount of money or a specific percentage in your estate. 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.”

Leaving money to charity in your Will or Living Trust are eligible for an estate tax deduction and can reduce your taxable estate, provided the organization is a qualified 501(c)3 organization.

An estate planning attorney can help you craft a provision in your Will or Trust that is tax advantageous and also leaves a desired amount to your designated charity, while also making sure this provision coincides with the remaining bequests to your heirs and beneficiaries.

Naming a Charity the Beneficiary of Qualified Retirement Accounts or Consider Qualified Charitable Distributions

Another way to incorporate charitable giving into your estate plan by naming a charity as the beneficiary of all or a portion of your tax-deferred retirement accounts (i.e., IRA, 401(k), 403(b), etc.). Aside from supporting a good cause that you personally care for, donating some or all of your retirement account assets have tax benefits as well.

Individuals named as beneficiaries of your retirement account will have to pay income taxes on any distributions they receive from your retirement account. Because charities are tax-exempt organizations, charities 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.

If you are over the age of 70½, consider making a Qualified Charitable Distribution (QCD) from your IRA. In lieu of taking a Required Minimum Distribution (RMD) from the account, the funds you take, up to $100,000, are transferred directly from the IRA to the charity. The funds are transferred directly to the charitable organization because any subsequent transfer to charity from the owner after the distribution would result in the contribution not qualifying as a QCD. When that happens, the owner could take a charitable contribution deduction, but only as part of itemized expenses (unless the deduction falls below $300 for an individual or $600 for a married couple for 2021, under the Coronavirus Aid, Relief and Economic Security (CARES) Act). The QCD excludes the distribution from the owner’s income while satisfying the RMD. Although the minimum age for receiving RMDs was increased to 72 upon the passage of the SECURE Act, this approach continues to apply to account holders over the age of 70½. The QCD presents a powerful charitable planning tool for anyone required to take RMDs or for those age 70 ½.

Consider a Charitable Remainder Trust

Another way to incorporate 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 while also supporting your favorite charity.

A CRT 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.

The CRT has some great tax benefits. With this trust, you receive a current income tax deduction for the value of the charity’s remainder interest, determined actuarially, even though the charity receives nothing until many years in the future when the trust term ends. The amount of the deduction varies based upon the term of the income interest, the rate of payment, and the assumed interest rate.

Furthermore, when the CRT sells the appreciated assets, the CRT itself is not subject to capital gains taxes. Instead you get a charitable deduction for the donation, thus preserving the full value of the appreciated assets to reinvest in a diversified portfolio.

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, distributions to lead beneficiaries, and the responsibilities of the trustee, it’s vital that you consult with both a financial advisor and an estate planning attorney if you are considering setting up a CRT.

This article only touches on the basic concepts of a whole host of options available for charitable giving. If you are charitably inclined, explore these and the many other potential strategies with a qualified estate planning attorney. An attorney who specializes in this area can help you understand all the charitable giving options and the best way to structure your gift to achieve maximum impact.


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