How to Include Philanthropy in Your Estate Planning
When it comes to your estate plan, you’re rewarded by doing good.
In this article, we’ll cover some of the ways you can include charitable giving in your estate planning.
Giving money to charity not only benefits a good cause. You gain a sense of personal satisfaction. Plus, it can also bring savings in estate taxes.
Gift Transfer Taxes
The federal government taxes transfers of wealth you make to others, both during your life and at your death.
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.
In 2022, an individual can give $12.06 million without having to pay federal estate or gift tax. After 2025, these amounts are scheduled to revert to their pre-2018 levels and cut by about one-half.
- A separate generation-skipping transfer (GST) tax applies to transfers made to grandchildren and lower generations. For 2022, the GST tax has a $12.06 million exemption. The top rate is 40 percent.
- In 2022, generally, the federal gift and estate tax is imposed on transfers in excess of $12.06 million and at a top rate of 40 percent.
- You may also be subject to state transfer taxes.
Careful planning is needed to minimize transfer taxes. Many people are considering making gifts now while the tax exemption is high. 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.
Easy Charitable Giving: Outright Bequest in Your Will
The easiest and most direct way to include charitable giving in your estate is by an outright bequest of cash in your will.
Making an outright bequest requires only a short paragraph in your will. You just need to name the charitable beneficiary and state 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.
Name a Charity as Your IRA or Retirement Plan Beneficiary
Another simple way to give in your estate is to name your favorite charity as your beneficiary to your IRA or employer-sponsored retirement plan.
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 tax benefit can save combined taxes that otherwise could eat up a substantial portion of your retirement account.
Use a Charitable Trust
Charitable trusts are a popular tool for charitable giving and estate tax savings. Although costs are associated with creating these legal agreements, people with large estates may find them helpful in achieving their goals.
The most common types of charitable trusts are 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.
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.
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 that a portion of the donation is brought back into your estate through the charitable income tax deduction.
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.
Charitable Giving: Make a Plan
You have many options to include charitable giving in your estate planning. Not only does it make financial sense, but you can plan for the causes you want to support and make provisions for the future.
If you’d like a guide to help you through your estate planning efforts, we can help you.
If you have questions, reach out to us at 314-961-1600 or contact us to discuss your situation.
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James Curran works with individuals and businesses and is passionate about getting to know his clients and their goals, both personal and professional. He spends time with them, helping to identify and solve their most pressing questions and concerns.
About Smith Patrick CPAs
Smith Patrick CPAs is a boutique, St. Louis-based, CPA firm dedicated to providing personal guidance on taxes, investment advice and financial service to forward-thinking businesses and financially active individuals. For over 30 years, our firm has focused on providing excellent service to business owners and high-net worth families across the country. Investment Advisory Services are offered through Wealth Management, LLC, a Registered Investment Advisor.