You are likely well aware of the tax benefits that come from donating to charity during your lifetime—donations to charity are tax-deductible. But you may be surprised to learn about the numerous benefits that are available when you incorporate charitable giving into your estate plan.
As with donating to charity during your lifetime, dedicating a portion of your estate to a charitable cause can reduce the taxable value of your estate. And if you have highly appreciated assets like stock 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 a lifetime income stream for yourself and your family, all while supporting your most beloved charitable cause.
LEAVE MONEY TO CHARITY IN YOUR WILL OR REVOCABLE LIVING TRUST
One of the simplest ways to donate to charity in your estate plan is to name a charity as the beneficiary in either your will or revocable living trust.
In either your will or living trust, you can also 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 that the charity can actually fulfill that purpose.
Leaving money to charity in your will or living trust can reduce the taxable value of your estate, thus reducing estate taxes for your heirs. That said, the current federal estate tax exemption is $12.9 million per person, so unless you are very wealthy, you won’t see any tax benefit—at least at the federal level. Texas has no state estate taxes.
NAME A CHARITY AS THE BENEFICIARY OF YOUR RETIREMENT ACCOUNT
As with 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.). 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.
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.
SET UPA 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—all 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.
CRTs come with very specific and complex requirements surrounding their creation, operation, and the responsibilities of the trustee, but they can be very beneficial tools in estate planning.
Although these three methods for structuring charitable donations into your estate plan are among the most popular, there may be other options available.
This article is a service of Law Office of Lasca A. Arnold, PLLC.
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