You are probably already aware of the tax benefits from donating to charity during your lifetime—donations to charity are tax-deductible. But did you know that there are also benefits to including charitable donations in your legacy plan? Dedicating a portion of your estate to a charitable cause can actually reduce the taxable value of your estate. You can also reap tax benefits by naming your favorite charity as the beneficiary of your IRA, 401(k), or other retirement accounts.
And, if you have highly appreciated assets like stocks and real estate that you want to sell, 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 an ongoing income stream for you and your family, all while supporting your favorite charitable cause! While as Ambitious Legacy Attorneys, we can help you find the most beneficial option for donating to charity through legacy planning, we want to share with you three of the most popular ways to structure charitable giving into your legacy plan.
1. You Can Leave Money To Charity In Your Will Or Revocable Living Trust
One of the easiest ways to include a charitable donation in your legacy plan is to name a charity of your choice as the beneficiary in either your will or revocable living trust. Just make sure that when you leave money in your will or living trust that you use the correct legal name of the charity, since many charities have very similar names if you aren’t specific, the charity may have difficulty accessing the funds. In either your will or living trust, you can state what you would like the charity to use the funds for, or 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, make sure that the charity can actually fulfill that purpose or they may not be able to accept the gift. Also keep in mind that if your request is really specific, you may want to contact the charity beforehand to see if the organization will be able to fulfill this purpose. It’s also important to remember that if you leave money to charity in your will, your will must first go through the court process of probate (which can be a time-consuming process), before the organization can access the funds following your passing. However, donations to charity made through a trust would pass to the charity immediately upon your death.
Leaving money to charity in your will or living trust can reduce the taxable value of your estate, in turn reducing estate taxes for your heirs. That being 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 least on the federal level. However, 17 states currently have state estate taxes that start at lower exemption amounts, so if you live in one of those states and leave money to charity through your estate plan, your family may be able to benefit from reduced estate taxes at the state level.
2. You Can Name A Charity as the Beneficiary of Your Retirement Account
Just as you can leave money to charity in your will or living trust, another easy way to include charitable giving into your legacy plan is to name a charity as the beneficiary of all, or a percentage of your tax-deferred retirement accounts (i.e. IRA, 401(k), 403(b), etc.). In addition to supporting a good cause that means a lot to you, donating your retirement account assets to charity comes with some great tax-saving benefits. Any individuals that you name as beneficiaries of your retirement account will have to pay income taxes on any distributions they receive from your retirement account. But since charities are tax-exempt, charitable organizations named as beneficiaries will receive the full amount of your retirement account assets. Additionally, although you’ll need to include the value of the retirement account assets as part of the gross value of your estate, you will receive a tax deduction for the charitable contribution, which can offset estate taxes.
Lastly, 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 and condenses income tax payments into a much shorter period. Those who don’t withdraw funds within the 10-year window face a 50% tax penalty on any assets remaining in the account. But because charities don't pay income taxes, it may be more beneficial from a tax-saving perspective to leave your retirement assets to charity, and pass on your non-retirement assets to your loved ones. However, the SECURE ACT does offer exemptions to the mandatory 10-year withdrawal rule for certain beneficiaries, which includes your spouse, minor children, and disabled/chronically ill individuals. To decide which avenue is best for you and what you’re looking to pass on, you should consult with us, as your Generational Wealth Lawyers.
3. You Can Set Up a Charitable Remainder Trust
One final way you can structure charitable giving into your legacy plan is by creating a special trust known as a charitable remainder trust or CRT. If you have highly appreciated assets like stocks and real estate that you want to sell, you can use a CRT to avoid income and estate taxes—all while creating a lifetime income stream for you or your family and supporting your favorite charity. A CRT is a “split-interest” trust, which means it provides financial benefits to both the charity and a non-charitable beneficiary. With CRTs, the non-charitable beneficiary (i.e. you, your child, spouse, or other heir) receives annual income from the trust, and any assets that “remain” at the end of your lifetime (or a fixed period up to 20 years), will pass to the named charity or charities of your choosing.
When you set up a CRT, you name a trustee, an income beneficiary, and a charitable beneficiary. The trustee will sell, manage, and invest the trust’s assets to create income that’s paid to you or another beneficiary. The trustee can be yourself, a charity, another person, or a third-party entity. With the CRT set up, you transfer your appreciated assets into the trust, and the trustee sells it. Normally, this would 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 proceeds (which haven’t been taxed) are invested to generate revenue.
As long as it remains in the trust, the income isn’t subject to taxes, so you’re earning even more on pre-tax dollars. And when the trust assets finally pass to the charity, that donation won’t be subject to estate or income taxes.
Because CRTs come with very specific and complex requirements surrounding their creation, operation, and the responsibilities of the trustee, it’s important that you consult with us, your Generational Wealth Lawyers if you are considering setting up a CRT.
We’re Here To Support You
Although these three methods for structuring charitable donations into your legacy plan are most popular, there may be other options available. Meet with us, as your Ambitious Legacy Attorneys, to determine the best way to achieve your charitable goals while saving on taxes and reaping other financial benefits. Schedule your Discovery Call today to learn more.
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