When developing your estate plan, you can do well by doing good. Leaving money to charity rewards you in many ways. It gives you a sense of personal satisfaction, and it can save you money in estate taxes.
A few words about transfer taxes
The federal government taxes transfers of wealth you make to others, both during your
life and at your death. In 2024, generally, the federal gift and estate tax is imposed on
transfers in excess of $13,610,000 ($12,920,000 in 2023) and at a top rate of 40
percent. There is also a separate generation-skipping transfer (GST) tax that is imposed
on transfers made to grandchildren and lower generations. For 2024, there is a
$13,610,000 ($12,920,000 in 2023) exemption and the top rate is 40 percent.
The Tax Cuts and Jobs Act, signed into law in December 2017, doubled the gift and
estate tax basic exclusion amount and the GST tax exemption to $11,180,000 in 2018.
After 2025, they are scheduled to revert to their pre-2018 levels and cut by about
one-half.
You may also be subject to state transfer taxes.
Careful planning is needed to minimize transfer taxes, and charitable giving can play an
important role in your estate plan. By leaving money to charity the full amount of your
charitable gift may be deducted from the value of your gift or taxable estate.
Make an outright bequest in your will
The easiest and most direct way to make a charitable gift is by an outright bequest of
cash in your will. Making an outright bequest requires only a short paragraph in your will
that names the charitable beneficiary and states the amount of your gift. The outright
bequest is especially appropriate when the amount of your gift is relatively small, or
when you want the funds to go to the charity without strings attached.
Make a charity the beneficiary of an IRA or retirement plan
If you have funds in an IRA or employer-sponsored retirement plan, you can name your
favorite charity as a beneficiary. Naming a charity as beneficiary can provide double tax
savings. First, the charitable gift will be deductible for estate tax purposes. Second, the
charity will not have to pay any income tax on the funds it receives. This double benefit
can save combined taxes that otherwise could eat up a substantial portion of your
retirement account.
Use a charitable trust
Another way for you to make charitable gifts is to create a charitable trust. There are
many types of charitable trusts, the most common of which include the charitable lead
trust and the charitable remainder trust.
A charitable lead trust pays income to your chosen charity for a certain period of years
after your death. Once that period is up, the trust principal passes to your family
members or other heirs. The trust is known as a charitable lead trust because the
charity gets the first, or lead, interest.
A charitable remainder trust is the mirror image of the charitable lead trust. Trust income
is payable to your family members or other heirs for a period of years after your death or
for the lifetime of one or more beneficiaries. Then, the principal goes to your favorite
charity. The trust is known as a charitable remainder trust because the charity gets the
remainder interest. Depending on which type of trust you use, the dollar value of the
lead (income) interest or the remainder interest produces the estate tax charitable
deduction.
There are costs and expenses associated with the creation of these legal instruments.
Why use a charitable lead trust?
The charitable lead trust is an excellent estate planning vehicle if you are optimistic
about the future performance of the investments in the trust. If created properly, a
charitable lead trust allows you to keep an asset in the family while being an effective
tax-minimization device.
For example, you create a $1 million charitable lead trust. The trust provides for fixed
annual payments of $80,000 (or 8 percent of the initial $1 million value of the trust) to
ABC Charity for 25 years. At the end of the 25-year period, the entire trust principal
goes outright to your beneficiaries. To figure the amount of the charitable deduction, you
have to value the 25-year income interest going to ABC Charity. To do this, you use IRS
tables. Based on these tables, the value of the income interest can be high — for
example, $900,000. This means that your estate gets a $900,000 charitable deduction
when you die, and only $100,000 of the $1 million gift is subject to estate tax.
Why use a charitable remainder trust?
A charitable remainder trust takes advantage of the fact that lifetime charitable giving
generally results in tax savings when compared to testamentary charitable giving. A
donation to a charitable remainder trust has the same estate tax effect as a bequest
because, at your death, the donated asset has been removed from your estate. Be
aware, however, that a portion of the donation is brought back into your estate through
the charitable income tax deduction.
Also, a charitable remainder trust can be beneficial because it provides your family
members with a stream of current income — a desirable feature if your family members
won’t have enough income from other sources.
For example, you create a $1 million charitable remainder trust. The trust provides that
a fixed annual payment be paid to your beneficiaries for a period not to exceed 20
years. At the end of that period, the entire trust principal goes outright to ABC Charity.
To figure the amount of the charitable deduction, you have to value the remainder
interest going to ABC Charity, using IRS tables. This is a complicated numbers game.
Trial computations are needed to see what combination of the annual payment amount
and the duration of annual payments will produce the desired charitable deduction and
income stream to the family.
Securities offered through IFP Securities, LLC, dba Independent Financial Partners (IFP), member
FINRA/SIPC. Investment advice offered through IFP Advisors, LLC, dba Independent Financial
Partners (IFP), a Registered Investment Adviser. IFP and Hitchcock Maddox Financial Partners are
not affiliated. This is for educational and information purposes only and is not research or a recommendation regarding any security or investment strategy. Neither IFP Advisors LLC, IFP Securities LLC, dba Independent Financial Partners (IFP), nor their affiliates offer tax or legal advice. Any potential tax advantages or benefits will depend on your circumstances. Consult your
tax professional and/or legal expert about your individual tax situation and visit IRS.gov to learn more. Courtesy of Broadridge – Advisor Solutions.