What do you think of when you think of the word ‘legacy’? Something permanent you want to leave behind? The way you want to be remembered? Often when people turn their attention to estate planning, legacy planning becomes a part of the conversation. Certainly giving to charity has very real tax benefits; both income and estate tax. However, that is usually not the main motivation for giving back. Let’s talk about some ways you can give to charity that align both with tax planning and legacy planning goals.
Simple lifetime gifts. The simplest way to give, of course, is to make gifts during lifetime. Benefits of giving during lifetime include being able to see the donation being put to work (and to be thanked for the gift), an income tax deduction in most cases, and reducing your gross estate for estate tax purposes. There are also the intangible benefits of modeling giving for your descendants, and being able to put your values into action.
Donating appreciated assets adds more ‘punch’ to the income tax benefit. An example will demonstrate this: Joe owns some shares of stock that he purchased 40 years ago for $1.00 per share (that is his cost basis). The stock now has a fair market value of $75.00 per share. If Joe were to sell the stock and donate the proceeds, he would need to pay capital gains tax on the difference between the fair market value of the shares and the cost basis. After paying the tax, he would have a significantly reduced amount available to donate to charity, and of course, a reduced charitable deduction. Now, let’s say Joe decides to donate the shares of stock directly to the charity. The charity accepts the shares, sells them (no capital gains tax for the charity) and the charity receives a larger donation. Joe receives a tax deduction for the full fair market value of the shares. Everyone is happy.
Gifts in Will or Trust. Many people include charities in their Wills or Revocable Trust documents. This is an easy way to give, and provides benefits to charities, of course, and can reduce taxes for an estate. However, there are potential pitfalls, so be sure to consult an attorney when making these gifts. An example of a pitfall would result from naming a charity as a beneficiary in a revocable trust where IRA or other retirement funds will be flowing into the trust upon death. This can have unintended consequences by causing reduced ‘stretch’ options for taking funds out of the retirement plans, thus causing a higher tax for the beneficiaries.
IRA or Retirement Accounts. Making charities designated beneficiaries on an IRA, 401(k) or other tax qualified account can be an excellent strategy. There are a few reasons why this is so desirable: 1) it is simple. Typically, people will name spouse as primary beneficiary, then contingent beneficiary might be charity OR a percentage to children, and a percentage to charity; 2) since the retirement funds are typically taxed as ordinary income as money is withdrawn from the accounts, your heirs would rather have other (non-taxable) assets than these retirement accounts. Charities do not pay income tax, so they are happy to accept these funds; 3) it is easy to change your mind. You don’t need to have a Will or Trust re-drafted if you decide you are passionate about a new charity; you simply request a new beneficiary designation form and make the change. Note: Lifetime gifts are also an option from an IRA, once you reach age 70 ½. You may make a lifetime donation of up to $100,000 per year from your IRA account directly to charity, the donation counts towards your required minimum distribution (RMD), so there is no need to take the RMD, pay tax on it, and then donate a lower amount to charity.
Donor Advised Fund. You may create a Donor Advised Fund with a financial institution, a local community foundation, or a national foundation. Typically, these are funded with a large donation up front, and you may continue to add to the fund over time. You receive a tax deduction in the year funds are contributed. Each year, you, as the ‘advisor’ on the fund, select which charity(ies) will receive donations from the fund. This is a nice way to involve family in charitable decisions. After the donor’s death, the children may carry on as advisors to the fund if you so desire.
Charitable Remainder Trust. A Charitable Remainder Trust can be a wonderful way to remove assets from your taxable estate, retain an income stream for your (or you and your spouse’s) lifetime, and then have the remainder of the trust funds pass to a charity of your choosing upon death. This can be a nice option for people who have assets that exceed the Minnesota Estate tax exemption amount ($1.8 million per person in Minnesota for 2017), but who would like the security of an income stream during lifetime, or for a period of years. Feel free to contact one of our estate planning attorneys for more details on this strategy.
Life Insurance. Another strategy for removing assets from a person’s taxable estate and benefit a charity at the same time, is to make a gift of a life insurance policy. For example, Joe might take out an insurance policy on his life, naming his favorite charity as owner of the policy and beneficiary of the policy. Upon Joe’s death, the policy is not considered to be part of Joe’s gross estate because it is owned by the charity, and the funds then pass directly to the charity. The premium payments may even be deductible as charitable contributions; check with your tax advisor to be sure.