5 Ways to Incorporate Charitable Giving into Your Estate Plan
Giving appreciated stock shares, donating your RMDs and using charitable remainder trusts are just a few of the options you may not be aware of to help charities and your heirs at the same time.
People give to charities for many reasons — to honor a loved one, to help a cause they feel passionately about, or simply to do something good. However, charitable giving also has significant tax implications that can lower income taxes during your life as well as estate taxes at your death.
While in my experience the majority of people do not give to charity solely for tax reasons, it is best to plan to take maximum advantage of the tax benefits available. Advance planning can help ensure that you achieve the most tax savings available while meeting your charitable goals.
Here are five ways to structure your charitable giving into your estate plan:
Give Appreciated Stock
If you have publicly traded stock that has appreciated in value, consider giving that appreciated stock to a charity during your life. If you sell appreciated stock, you will pay capital gains tax on the appreciation. However, if you give the stock to charity, you will receive a charitable income tax deduction equal to the full fair market value of the stock at the time of the gift and will avoid capital gains taxes.
You will receive a benefit on the appreciated amount, without having to sell it. The charity can sell the stock without paying capital gains taxes because charities are tax exempt.
Individuals who are over 70½ may donate up to $100,000 per year to charities directly from their IRA. This is known as a Qualified Charitable Distribution (QCD). This QCD will count towards any required minimum distribution (RMD) an account holder must take from the IRA. Under the recently passed SECURE Act, RMDs must begin the April after the account holder turns 72. RMDs are considered taxable income and are taxed at ordinary income rates.
With a QCD you can benefit charity, fulfill your RMD requirement, and exclude that amount from your income. This can be a good strategy for individuals who do not “need” the distribution to cover living expenses.
Bequest in Your Will or Revocable Trust
A very simple and direct way to benefit charity at your death is to leave a bequest in your will or revocable trust. A bequest is a sentence in either your will or trust stating the amount you’d like to leave to the charity, identifying the specific charity to receive the amount, and stating the purpose for which you’d like the charity to use the funds. It is very important to ensure that you use the correct legal name of the charity, because some charities have similar names.
If you are not specific, you could create confusion. In addition, the gift can be for a charity’s “general purpose,” meaning the charity can use the funds as it sees fit, or for a specific purpose that you detail. When listing a specific purpose, be certain that the charity can fulfill that purpose, otherwise the charity may need to refuse the bequest. If your request is very specific, you should consider contacting the development office to confirm the charity is able to achieve your objective.
Charitable bequests are also eligible for the estate tax deduction and will reduce estate taxes. While the federal estate exemption amount is currently $11.54 million, and not an issue for 99.9% of individuals, 12 states (and the District of Columbia) still have state estate taxes that kick in at lower exemption amounts. In those states, a charitable bequest at your death can help reduce state estate taxes.
Name a Charity as the Beneficiary of Your Retirement Account
It is relatively simple to name the charity as a beneficiary of all or a percentage of your non-Roth retirement accounts (IRA, 401(k), 403(b), etc.). The same rules for naming charities in your will or trust discussed above apply when completing the beneficiary designation form. Because the charity is tax-exempt, after your death it can withdraw the assets from the retirement account without having to pay income taxes on the withdrawal.
Any individuals named as beneficiaries of the retirement account must pay income taxes at ordinary rates on any distributions they receive from the retirement account. Therefore, the best income tax result is to benefit charity from the retirement account and your loved ones from other assets that will not be subject to income tax when they receive it.
In addition, due to the recent changes under the SECURE act, most IRA beneficiaries will now need to withdraw all funds from the retirement account within 10 years of the account holder’s death. This change in the law limits the ability of most individuals (other than a spouse, minor children or disabled or chronically ill individuals) to stretch out retirement account distributions; it limits the ability to continue investments with deferred taxes; and it compresses income tax payments over a much shorter period of time. Any amounts left to a charity at death would also receive an estate tax charitable deduction and lower any applicable federal or state estate taxes.
Consider a Charitable Remainder Trust (CRT)
You can benefit a charity and a family member by creating a charitable remainder trust (CRT) and naming the CRT as the beneficiary of your IRA. A CRT is a split interest trust where an individual you choose will receive annual payments from the CRT for a period of time. When the individual’s interest in the CRT terminates, the remaining amount is distributed to charities of your choosing.
There are very specific rules about how a CRT must operate, including how much an individual can receive from the CRT and how long he or she can receive it. In addition, from an actuarial standpoint, the charities must receive a certain percentage from the CRT when it is funded. Due to the many rules surrounding the creation and operation of a CRT, an attorney is essential to create it properly.
The main reason to consider using a CRT is that the CRT itself is tax-exempt during its existence (like a charity). When you name the CRT as the beneficiary of the IRA, the CRT will receive the funds from the IRA at your death and not pay any income taxes at that time. However, when the individual identified in the CRT receives annual payments, he or she will then pay income taxes on the amount received at that time. In addition, a partial estate tax deduction is allowed upon the account holder’s death based upon a calculation determining the amount the charity will ultimately receive from the CRT.
As you can see, there are many ways to benefit charities, either during your life or at your death. Which way you choose can have different tax implications. Taking into account taxes with your charitable giving can ultimately increase the amount received by not only the charity, but your loved ones as well.
About the Author
Partner and Chair of Trusts and Estates Group, Mirick O'Connell
Estate attorney Tracy Craig is a partner and chair of Mirick O'Connell's Trusts and Estates Group. She focuses on estate planning, estate administration, prenuptial agreements, tax-exempt organizations, guardianships and conservatorships and elder law. Craig is a Fellow of the American College of Trust and Estate Counsel and an AEP®. She has received an AV® Preeminent Peer Review Rating by Martindale-Hubbell, the highest rating available for legal ability and professional ethics.