A will tells a person’s family and others how a person wishes to have their assets distributed after their death. A person can distribute property, personal and real, as well as cash and financial instruments among their heirs in their will. Most people leave their assets to their children and possibly other relatives. This is the most simple type of estate plan.
But many people also seek to leave a legacy that can have an impact on society beyond their own family circle. They want to make a domination to their preferred charitable cause. Naming a charity as a beneficiary in your will or living trust is one easy way to donate to charity through estate planning. It can have the advantage of lowering the amount of estate tax that a person pays.
There are, however, many options when it comes to giving to charity in your estate plan.
What Is Charitable Giving in Estate Plan?
It is not only possible to name a non-profit, charitable group as a beneficiary in one’s will, there are a number of different ways to benefit a charity in a person’s estate plan. Of course, a person can make a simple bequest of cash outright. But there are many other options, such as setting up a trust fund for a charity or naming a charity as a beneficiary of one’s rollover individual retirement account (IRA).
There are other options as well for donating to charity through an estate plan. Many of them do not involve your will at all. And they can generate income tax and estate tax deductions.
Why Is It Important to Make Charitable Donations in an Estate Plan?
Estate planning can be about more than just distributing your assets to family members, as important as that is. Incorporation charitable giving is about creating a legacy that extends beyond the realm of a person’s own personal circle and their own lifetime.
Incorporating charitable donations is a way for the testator to have a lasting impact on charitable causes and through them to the lives of people in society at large. And charitable giving always speaks to the donors’ compassion, social responsibility and selflessness.
What Are the Benefits of Charitable Giving?
The benefits to making gifts to charity in your estate plan are both emotional and financial. They can include the following benefits:
Tax Advantages to Charitable Donations in an Estate Plan
One of the benefits of charitable giving through an estate plan are the tax advantages to the donor. There are tax advantages to making donations to charity, and there are tax advantages to making charitable bequests to a non-profit in a will or through another estate plan mechanism, e.g. a living trust.
People who make donations to qualified charities are entitled to a charitable deduction if they itemize deductions on their income tax return. That is an important qualification. The charitable deduction is only available if a person itemizes deductions on their income tax return.
If a person simply takes the standard deduction, they would not be eligible to claim a charitable deduction. Several factors would determine the amount of the deduction if you are eligible to use it. If the allowable deduction is more than your adjusted gross income limits, the excess can even be carried over for use in future years for as many as 5 years.
Making a charitable gift through an estate plan also has tax benefits. One of the main potential tax benefits may be the unlimited charitable deductions from the value of a person’s estate for the full value of assets donated by an estate directly to a charity. Whether the property has appreciated is not relevant. Gifts made to charity upon the death of the donor can be deducted on an estate tax return.
Of course estate taxes are only paid on estates with a value of $12.06 million in 2022 and assets with a value of $12.91 million in 2023. The vast majority of people do not have to pay federal estate taxes.
Creating a Lasting Legacy
When creating an estate plan, a person wants to think about whether it is their wish to have at least some part of their estate go to a charitable cause. A person would want to give careful consideration to what cause or purpose they wish to promote and which organizations best serve that purpose or goal.
Fulfilling Personal Philanthropic Goals
Chief among a person’s considerations would be clearly defining the values and beliefs that the donor wants to promote with their wealth. For example, a person might want their giving to promote educational equity or research in a cutting-edge area of medical research.
A donor might want to think about what success for a charitable enterprise would look like and how the donor’s giving can best promote it. What can the donor do to advance achievement of the charity’s goal?
A person who is considering a charitable gift of significant size may want to consult directly with officers of charities to get the information they need to make the best choices. Most charities of any size welcome donations through estate planning and are familiar with the topic. They would be happy to discuss the donor’s wishes and goals and how their charity might serve them.
What Are the Methods for Making Charitable Gifts in an Estate Plan?
The most straight-forward way to make charitable donations after death is through a direct bequest to a charity in a will or through a charitable trust.
There are a variety of trusts that a donor can use for charitable giving through an estate plan. One of them is the simple charitable trust. It is a trust entity to which the donor gives assets. The trust holds the assets which the trustee manages.
The trust then distributes its proceeds and assets to charity as directed in the trust document by the donor, both during the donor’s lifetime and then after their death.
If managed expertly, a charitable trust can increase the value of the original trust gift over time. Charitable trusts are sometimes used to manage real estate. A donor might leave their house to the town they live in to use as a municipal art museum. The trustee of the trust would oversee its use and caretaking even after the donor’s death. Usually, however, charitable trusts are funded with cash.
What Is a Charitable Remainder Trust?
With a charitable remainder trust (CRT), the grantor donates assets to a trust established for a charitable purpose. The trustee invests the assets so as to generate an income stream. The income can go to the grantor during their lifetime or another person named by the trantor to be the beneficiary of the income.
The assets that remain in the trust pass to a charitable organization when the trust terminates. The trust usually terminates after a set number of years or at the time of death of the last person receiving income from the trust.
There are tax advantages to a CRT. The grantor’s original gift to the CRT may be tax deductible as a gift to the charity. Usually the value of any possible deduction is capped at 30% of the grantor’s adjusted gross income (AGI).
There are a number of factors that affect whether the donation is tax deductible including the income received from the trust every year, the kind of assets donated to the trust and their value and other considerations as well. If the value of the deduction is such that it cannot be used completely in the first year, the donor may be able to carry it forward for as long as five years.
What Is a Donor-advised Fund?
One way to have a degree of input into how one’s donation is used is to give to a charity through a donor-advised fund (DAF). A donor advised fund is set up by a charity. A donor opens their account in the fund and makes their donation of cash or other financial instruments. By doing this, of course, the donor has surrendered ownership of the assets they give to the fund.
However, they continue to have the privilege of advising as to how the account is invested and how it should distribute the income to the charity.
Can a Life Insurance Policy Be Used for Charitable Giving?
A relatively easy way to give to charity after one’s death is to make a charitable non-profit the beneficiary of a life insurance policy in your name.
How Do I Select Charities to Which I Want to Give?
Of course, you want to give careful thought to identifying the organization that would benefit from your charitable gift. There are many from which to choose. Most charities are funded largely by generous charitable giving that donors make through their estate plans. They are eager to work with a person to help them plan their giving through an estate plan.
How Do I Identify Causes and Organizations Aligned with My Values?
A main consideration in choosing a charitable organization would be to choose one, or more, that best aligns with your values and goals. The range of options is wide and varied from organizations that work to improve civil rights or human rights to those that serve scientific research or health care accessibility.
Should I Research and Vet Charitable Organizations?
You should devote some time to reviewing charities, the kinds that are available, the causes they serve and their reputations for good fiscal management and effective operation.
What Are the Legal Considerations in Charity through Estate Planning?
A person wants to consult a qualified estate planning attorney. Expert legal advice is necessary, if a person wants to make sure that any instrument, such as a will or trust deed, is drafted correctly and will be effective without question at the time it is needed. In addition, if your gift is going to be sizable, you may want expert tax advice as well.
You definitely want to consult an estate planning attorney to devise a complete estate plan that includes charitable giving.
One major concern would be complying with tax laws and regulations and getting the greatest possible tax advantage from your giving. Your estate planning attorney would be well-acquainted with tax law and regulations and would be familiar with strategies for maximizing the tax advantages of charitable giving.
Do I Need the Help of an Attorney for Charitable Giving in My Estate Plan?
While minimizing taxes is one notable advantage of estate planning for charitable giving, the main goal is creating a legacy of generosity and support for an organization that changes lives for the better through its charitable activity.
When planning your estate, you want to take the time to explore charitable giving and, with your family law attorney, determine how best you can support the charities of your choosing.
