Thoughts on creating a legacy through charitable giving often begin later in life, when children are grown, with children of their own. Thoughts of charitable giving often coincide with grandchildren heading back to school when the pleasure of long summer visits come to a close.
This is often the time to add deeper meaning and enhance the family’s vision for the future. A straight-forward gift to an organization through your will is one way, but there is always the possibility a gift made through a will can be challenged, so your charitable goals may not be realized. There are other ways to give, many resulting in tax benefits to the estate and heirs.
Charitable Remainder Trusts are irrevocable trusts funded with cash or other property to generate an income stream from the trust to the beneficiary for a certain term of years or for life. At the end of the term or when the grantor dies, the named charity receives the remaining assets in the trust. The donor receives an immediate tax deduction when the CRT is funded, calculated on the value of the assets to go to the charity.
Charitable Lead Trust is the reverse of the Charitable Remainder Trust. The CLT is also an irrevocable trust, producing an income stream to a named charity for a term of years or during the life of the grantor, and the named beneficiaries receive the remainder of donated assets at the end of the term or upon the death of the grantor. The appreciation of trust assets are not subject to estate tax or gift taxes at the end of the trust.
Both CRTs and CLTs may be annuity trusts or unitrusts. If an annuity trust is used, a fixed amount is paid to the income beneficiary every year. If a unitrust is used, the annual payment will vary, depending upon the value of the assets in the trust.
Qualified Charitable Distributions (QCDs) are gifts made from your traditional IRAs. The donations are counted towards your Required Minimum Distributions (RMDs). This is a good solution for individuals who don’t need the income from their IRAs and are charitably minded. The new rules for inherited IRAs require non-spousal heirs to empty the accounts within ten years, making QCDs more attractive.
Donor Advised Funds (DAFs) are charitable investment accounts. Contributions may be of cash, securities or other assets and most donations create an immediate tax deduction. The funds are invested for tax-free growth. The donation is irrevocable, and the funds cannot be returned to the donor.
Donating securities is a simple strategy to support an organization and minimize taxes. If an appreciated asset is sold, a capital gains tax may be due on the appreciation. But if it is gifted to a charity, there is no capital gains tax for the donor or the charity. The donor is also eligible for a charitable income tax deduction equal to the fair market value of the security, up to 30% of the household’s Adjusted Gross Income (AGI).
Making charitable donations during your lifetime makes sense if you are near retirement and expect your income level to decrease in the coming future. Similarly, if you are about to sell a business or your share of a business and realize large profits, charitable giving could be part of your overall estate planning strategy to reduce taxes.
For people who volunteer and are active in their communities, making charitable giving part of your estate plan is an extension of how you lead your life and the example you set for your family. If a demanding career meant you never had time to devote to your community, then consider your estate plan an opportunity to enhance your legacy and instruct your descendants.