3 Smart Ways to Add Charitable Giving to Your Estate Plan

Sabine Franco
5 days ago
6 min read

You probably know about the tax benefits of donating to charity during your lifetime. Donations are tax-deductible. But you may not realize the significant benefits available when you incorporate charitable giving into your estate plan.

Just like donating during your lifetime, dedicating a portion of your estate to a charitable cause can reduce the taxable value of your estate. You can also receive major tax savings 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 stock and real estate that you want to sell, you can set up a special type of charitable trust that helps you avoid both income and estate taxes while creating a lifetime income stream for yourself and your family, all while supporting your most beloved charitable cause.

As an estate planning lawyer, I can help you find the most beneficial option for a charitable giving estate plan. Here are three of the most popular ways to structure charitable giving into your plan.

1. Leave Money to Charity in Your Will or Revocable Living Trust

One of the simplest ways to create a charitable giving estate plan is to name a charity as the beneficiary in either your will or revocable living trust. Just make certain you use the correct legal name of the charity. Many charities have very similar names, and if you aren't specific, the charity may have difficulty accessing the funds.

In either your will or living trust, you can state the purpose for which you'd like the charity to use the funds, 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 the charity can actually fulfill that purpose or the charity might have to refuse the gift. If your request is really 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, which can be time-consuming, before the organization can access the funds following your passing. On the other hand, donations to charity made via 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, which reduces estate taxes for your heirs. That said, the current federal estate tax exemption is $13.99 million per person, soon to be $15 million, so unless you are very 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, so if you live in one of those states and include charitable giving in your estate plan, your loved ones may be able to benefit from reduced estate taxes at the state level.

2. Name a Charity as the Beneficiary of Your Retirement Account

Just like leaving money to charity via your will or living trust, another easy way to incorporate charitable giving into your estate plan 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 that's close to your heart, 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 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, though you 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.

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. This eliminates the ability of most individual beneficiaries to stretch out retirement account distributions over time and compresses income tax payments into a much shorter period. Those who fail to withdraw funds within the 10-year window face a 50% tax penalty on the assets remaining in the account.

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 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 an estate planning lawyer to determine the most beneficial option for passing on your retirement account assets as part of your charitable giving estate plan.

3. Set Up a Charitable Remainder Trust

One final way to structure charitable giving into your estate plan is by creating a special trust known as a charitable remainder trust (CRT). If you have highly appreciated assets like stock and real estate you wish to sell, you can use a CRT to avoid income and estate taxes while creating a lifetime income stream for yourself or your family and supporting your favorite charity.

A CRT is a "split-interest" trust, meaning 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 or charities.

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 produce 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 produce income.

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.

Common Questions About Charitable Giving Estate Plans

Can I change my mind after naming a charity as a beneficiary in my estate plan?

Yes, absolutely. If you name a charity in your will or revocable living trust, you can change or remove that beneficiary at any time while you're alive and mentally capable. You can also change the beneficiary designation on your retirement accounts whenever you want. The only exception is if you've set up an irrevocable charitable trust, which generally cannot be changed once it's established. That's why it's important to work with an estate planning lawyer to make sure you choose the right charitable giving structure for your situation.

Will my family get less inheritance if I include charitable giving in my estate plan?

That depends on how you structure it. Yes, any assets going to charity won't go to your family members. However, the tax savings from charitable giving can actually result in your family receiving more after taxes than they would have otherwise. For example, if you leave a retirement account to your children, they'll pay income taxes on it. But if you leave the retirement account to charity (tax-free) and leave other non-retirement assets to your children, your family may end up with more money overall. An estate planning lawyer can help you run the numbers to see what makes the most sense.

Do I need to be wealthy to include charitable giving in my estate plan?

No. Charitable giving in your estate plan makes sense at almost any wealth level. Even modest donations can make a real difference to the charities you care about. While the tax benefits are greatest for larger estates (especially those subject to estate taxes), anyone can include charitable giving in their estate plan. You might leave a specific dollar amount, a percentage of your estate, or name a charity as a backup beneficiary if your primary beneficiaries don't survive you. The important thing is that your charitable giving estate plan reflects your values and your financial reality.

This article is a service of The Ambitious Legacy Firm. We do not just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer a Legacy Planning Session, during which 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 using the link below to schedule a call with our Client Services Director, who will be able to guide you on scheduling your Legacy Planning Session.

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