What Are the Benefits of Including Charitable Giving in Your Estate Plan?

Including charitable gifts in your estate plan has two significant benefits – it enables you to accomplish charitable goals while creating substantial tax advantages for your estate. Incorporating gifts to charity into your estate plan can eliminate the worries about donating too much now and depleting your nest egg, which may be needed for long-term care or other purposes. The personal satisfaction of giving to your favorite charity is compounded by financial benefits while you live and the estate you leave behind. These benefits include:

  • Income tax deductions: Charitable donations made during your lifetime can be deducted at up to 60% of your adjusted gross income for a potentially significant reduction in taxes.
  • Avoiding capital gains tax: Donating assets such as real estate or stocks directly to charity makes it possible to avoid paying capital gains tax if those assets have appreciated in value. You would likely have to pay capital gains tax if you first sold the assets and then donated the proceeds to charity.
  • Reduced estate taxes: Most gifts to recognized charities are exempt from federal estate tax. Any portion of your estate gifted to a charity can reduce tax liability, leaving more of your estate for your heirs. As stated by the IRS, “If the decedent leaves property to a qualifying charity, it is deductible from the gross estate.”
  • Bypassing probate: Assets gifted to charities may be able to pass directly outside of probate with no delays or additional costs. For example, you could name the designated charity as a “transfer on death” beneficiary on a bank account.
  • Avoiding IRA tax consequences: Under recent changes to the law, IRA funds must be distributed to many types of beneficiaries over ten years, which can create tax consequences. When a charitable organization is named as beneficiary, however, it can optimize the after-tax value of the IRA.

How Can You Integrate Charitable Giving Into Your Estate Plan?

Charitable giving can play an important role in wealth management and estate planning. Once you have decided to incorporate philanthropic giving into your estate plan, take the following steps:

Choose a Cause that Matters to You

Donate your assets where your passions lie. Decide which cause or group of causes is most meaningful to you. To help narrow your focus, consider which issues in your community most concern you for present and future generations. Choose one or more charitable organizations that are doing something about those issues.

Decide Which Assets to Give to Charity

The next step is to decide how much you wish to donate to charity, now and in the future, and what form those assets will take. Virtually all charitable organizations accept cash donations. Some charities accept real estate, artwork, securities, and other physical and financial assets. One effective way to realize capital gains tax savings is to donate highly appreciated assets to a recognized charitable organization.

Determine What Forms Gifts to Charity Will Take

The last step is deciding which estate planning vehicles should be used to gift assets to charities. In addition to gifts made in your will or trust, other methods can potentially provide substantial tax benefits. Options for integrating charitable giving into an estate plan include:

  • Will bequest: This is a straightforward way to distribute assets to a charity after your death. It is done simply by specifying a percentage of your estate or an amount you want distributed to a charitable organization.
  • Life insurance: You can leave a significant amount to a charitable organization without reducing your current income by naming it as a beneficiary on your life insurance policy.
  • Charitable remainder trust: This vehicle allows you to donate assets to a charity and still retain some rights during your lifetime to income generated by those assets.
  • Charitable lead trust: This type of trust can help reduce estate taxes. Income generated from certain assets is donated to charity for a specified period. Once that period ends, the remaining assets are transferred back to you or your beneficiaries.
  • Retirement plan: Naming a charitable organization as the beneficiary of your retirement plan enables you to make a significant contribution to the charity of your choice while potentially reducing estate tax liability.
  • Donor-advised fund: A donor-advised fund is a fund or account maintained by a section 502(c)(3) organization, known as a sponsoring organization, as stated by the IRS. These funds are composed of contributions made by individual donors. Although the sponsoring organization has legal control over the account, donors have advisory privileges with respect to the investment of assets and distribution of funds. Contributions to a donor-advised fund provide tax benefits during your lifetime.
  • Pooled income fund: This fund operates with donations rather than investments in a similar manner as a mutual fund. You contribute securities or cash to a pooled income fund, receive immediate tax deductions, and earn income annually on the overall performance of the contributed funds. Upon your death, your remaining balance goes toward charitable causes.
  • Private family foundation: Another option is to establish a private charitable foundation, which can be established either while you are living or after your death. Each year, a percentage of the foundation’s assets must be distributed to charities. You may name a person or persons to run the foundation and pay them a reasonable salary. In establishing the foundation, you can specify which charities you want to support or leave it up to the trustees.

At Israel & Gerity, our experienced lawyers are well-versed in estate planning matters and knowledgeable in the relevant laws. Call us at 800-659-7575 to schedule a free consultation. We can advise you on integrating charitable giving into your estate plan.