You are likely well aware of the tax benefits that come from donating to charity during your lifetime. This is because donations to charity are tax-deductible. However, you may be surprised to learn about the numerous benefits that are available when you incorporate charitable giving into your Will and Trust.
As with donating to charity during your lifetime, dedicating a portion of your estate to a charity can reduce the taxable value of your estate. You can also receive tax savings by naming your favorite charity as the beneficiary of your IRA, 401(k), or other retirement accounts.
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 best option for donating to charity via Wills and Trusts planning, here are three of the most popular ways to structure charitable giving into your plan.
- Leave Money To Charity In Your Will Or Revocable Living Trust
One of the simplest ways to donate to charity 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.
In either your will or living trust, you can also state the purpose for which you’d like the charity to use the funds. 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, you will need to 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 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. This process 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 upon your death.
Leaving money to charity in your will or living trust can reduce the taxable value of your estate which will reduce 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 the federal level. However, 17 states currently have state estate taxes that kick in at lower exemption amounts. Therefore, if you live in one of those states and leave money to charity via your Will and Trust, your loved ones may be able to benefit from reduced estate taxes at the state level.
- Name A Charity as the Beneficiary of Your Retirement Account
Another easy way to incorporate charitable giving into your Will and Trust 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, 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 taxes on any distributions they receive from your retirement account. However, since charities are tax-exempt, charitable organizations named as beneficiaries will receive the full amount of your retirement account assets. Additionally, although you need to include the value of the retirement account 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. By doing this, it also compresses income tax payments into a much shorter period. The Act states that those who fail to withdraw funds within the 10-year window face a 50% tax penalty on the assets remaining in the account.
Further, 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 above mentioned 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, your Personal Family Lawyer, to determine the most beneficial option for passing on your retirement account assets.
- Set Up a Charitable Remainder Trust
A final way to structure charitable giving into your Will and Trust is by creating a special trust known as a charitable remainder trust (CRT). If you have highly appreciated assets like 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. This means that 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.
When you set up a CRT, you will name a trustee, an income beneficiary, and a charitable beneficiary of the trust. The trustee will be in charge of selling, managing, and investing 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.
Once the CRT is set up, you transfer your appreciated assets into the trust, and the trustee sells it. This would normally 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 un-taxed proceeds are invested to produce income.
As long as it remains in the trust, the income isn’t subject to taxes. This means that you’re earning even more on pre-tax dollars. When the trust assets finally pass to the charity, that donation won’t be subject to estate or income taxes.
Because CRTs come with 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 Will and Trust are among the most popular, there may be additional options available. Meet with us, your Personal Family Lawyer®, to determine the best way to achieve your charitable objectives while maximizing your tax-saving benefits. Schedule an appointment with us today to learn more.
This article is a service of Levi L. Alexander, Personal Family Lawyer®. We do not just draft documents. We help to ensure you make informed and empowered decisions about life and death, for yourself and the people you love. This is why we offer a Family Wealth Planning Session™. During this session, 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 to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session for free.