You’re 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 available when you incorporate charitable giving into your estate plan.
1. 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. Just make certain when you leave money that you use the correct legal name of the charity. 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.
2. 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.).
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’ll receive a tax deduction for the charitable contribution, which can offset estate taxes.
Consult with us to determine the most beneficial option for passing on your retirement account assets.
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—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.
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. When the trust assets finally pass to the charity, that donation won’t be subject to estate or income taxes.
Meet with us to determine the best way to achieve your charitable objectives while maximizing your tax-saving and other financial benefits.
AB Law, PLLC is a full-service business law and estate planning firm that serves clients throughout Texas. All consultations are free and no question is too silly, ridiculous, or complex. https://calendly.com/ablawpllc www.ab-firm.com