For many people, charitable giving and philanthropy are critical components of estate and legacy planning. If you care deeply about a cause, consider making it a part of your long-term financial and estate planning. Charitable giving has numerous benefits, such as favorable treatment under tax and estate laws, and many avenues to accomplish these goals.
Giving Through Your Will
There are multiple vehicles for charitable giving when preparing your estate plan. The first and most basic way is through your will, which can have a designated amount left for a charity that you identify. This is called a charitable bequest and is a common and simple way to give back to causes you care about after you pass away. It is not the most tax-efficient vehicle.
Trusts That Benefit Charities
Beyond wills, there are also different ways to give to charity through trusts. Your trust may direct your trustee to distribute a portion of its assets to charity after you pass away by designating a charitable organization as a beneficiary. One common way to do this is to name a charity as the beneficiary of the remainder of the estate or trust, or as the designated recipient of funds when no other beneficiaries survive the trust grantor. This way, you are accomplishing two goals at once: making sure your property passes to a cause of your choosing and that you have named a worthy beneficiary in the unlikely event that you have no remaining family members to inherit your property.
Advanced Trust Planning Options
There are also more complex trusts, defined in federal tax law, that may be useful depending on your need to plan for taxation. One of these trusts is called a Charitable Remainder Trust (CRT). These irrevocable trusts provide income to non-charitable beneficiaries for a set term or for their lifetime, with the remaining assets ultimately going to charity. CRTs offer certain tax advantages, such as avoiding capital gains taxes on liquidated assets. Another trust option is a Charitable Lead Trust (CLT). These trusts distribute payments to charities for a fixed term, and after the fixed term expires, the remaining assets go to non-charitable beneficiaries. By first designating a portion of the trust’s income to charitable organizations for the fixed term, the taxable value of the remaining trust assets that are transferred to non-charitable beneficiaries is significantly reduced. In addition, depending on the way the trust is structured, donors may qualify for immediate income tax deductions or reduce their taxable estate.
Donor Advised Funds and Private Foundations
Outside of wills and trusts, you could also set up a Donor Advised Fund (DAF) as a vehicle for long-term charitable giving. A DAF is a charitable investment account where donors can contribute assets, receive immediate tax benefits, and recommend grants to charities over time. They offer flexibility in charitable giving and are managed by sponsoring organizations. Another way to plan your charitable giving is to set up your own private foundation, which can be recognized by the IRS as tax-exempt and can be an avenue for making a significant donation while contributing to your specific non-profit goals as a donor.
Retirement Assets
One of the most tax-efficient methods for supporting charitable causes at death is to designate a charity as the beneficiary of your retirement assets, such as a traditional IRA or 401(k). Unlike individuals, charitable organizations do not pay income tax on distributions from retirement accounts. This means that 100% of your retirement assets can be used to support the causes you care about, rather than being reduced by income taxes. By leaving other, more tax-favored assets to family members and reserving retirement accounts for charitable giving, you can maximize the impact of your legacy.
Balancing Generosity with Strategy
There are many reasons why donating to charity can benefit you and your family, including tax advantages. As you consider how you plan to pass on your wealth, keep in mind the many ways that charitable giving can be used to support worthy causes while saving you and your family money on taxes.
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