If your estate is going to be taxable for federal estate tax purposes (i.e., its current value is or is expected to be in excess of the $11,400,000 exclusion amount, $22,800,000 for a husband and wife), charitable giving incorporated within the estate plan can be used to reduce the amount of estate taxes payable from the estate. Charitable gifts to “qualified charities” made in the estate planning document provide an estate tax deduction from the gross estate (on a dollar for dollar basis). As a result, making charitable gifts from your estate (if you are charitably minded) can be an important estate tax savings, as well as provide much needed benefits to those charitable organizations which you support.
Charitable giving through an estate plan can be accomplished in a variety of ways. The most common way is to simply make a bequest of cash or property to the charity of your choice in a will or trust. The bequest can be of cash, stocks, bonds, or real property; it can be of specific assets (such as 100 shares of Widget stock or of the property at 123 Main Street), or it can be a specific percentage of the residue of the estate or trust. As a typical example, a decedent's revocable living trust can have a provision which makes a specific charitable bequest or bequests to charities, with the remainder of the trust estate divided among other beneficiaries such as family members.
In addition to specific gifts in a decedent's will or trust, there are several, more complex charitable giving techniques that can be incorporated into an estate plan or be utilized as an adjunct to it. These techniques work well in specific instances which you and your estate planner may wish to investigate. For example:
- A Charitable Remainder Trust (CRT) is a type of irrevocable trust into which a person places assets to provide an annual specified amount for the donor or a named third party for a specific period of time or for the balance of the beneficiary's life. At the end of the stated period, the assets which were transferred into the trust will be distributed to the charity or charities designated in the trust document. The donor, or the estate, as the case may be, receives a charitable deduction based upon the value of the charitable interest calculated using IRS tables. Depending on the type of asset(s) in the trust and the duration, this arrangement may have significant benefits to the donor or other beneficiary in the form of a steady stream of income, an income tax charitable deduction to the donor or an estate tax deduction to his/her estate upon formation, beneficial special rules regarding gift, estate, or capital gains taxes.
- A Charitable Lead Trust (CLT) is the reverse of a CRT. Its purpose is to pay income to a charity for a certain number of years or during the donor's life (or life of other named beneficiary). Upon expiration of the time period stated in the instrument, the assets in the CLT are distributed to beneficiaries named in the trust. In this case, the charitable deduction is based upon the value of the gift and the period of time (term) of the charity's interest. The basic difference between a CRT and a CLT is that in a CRT, the charity receives the trust assets at the end of the term, whereas in a CLT the charity or charities receive the specified payment stream and the beneficiaries receive the trust assets at the end of the term.
- Designation of a charity as a beneficiary under a life insurance policy or an IRA. If you are the owner of a life insurance policy on your life, the policy is includable in your taxable estate for estate tax purposes (unless it passes to a person such as a spouse for which the estate tax marital deduction is applicable). However, if the named beneficiary is a charity, the amount included in the estate is deductible (dollar for dollar) for estate tax purposes and there is no increase in the taxable estate by reason of the policy's inclusion. The rules are similar with respect to an IRA and similar accounts where the named beneficiary is a charity. The IRA assets are includable in your taxable estate but the inclusion amount is entitled to a deduction (dollar for dollar) on the estate tax return because they are passing to charity.
- A gift to a donor-advised fund is another vehicle if you want to donate to a charitable fund that remains available to your heirs or family to continue your charitable legacy. The gift to the fund is entitled to an estate tax charitable deduction. Donor advised funds are administered by a public charity. You can create the fund during life or under your estate plan. You, during your life (or your heirs after your death), advise the fund on the charities to receive donations (usually annually) over the period in which the fund is administered. A donor-advised fund is an alternative to setting up a private foundation which would manage the person's charitable giving goals. For modest gifts or for ease of administration, the donor advised fund can be more cost effective. Generally, an administrative fee is charged by the fund to absorb the costs involved in managing the many separate family funds administered by the staff of the donor advised fund.
- Finally, there is the alternative of establishing a private foundation which can receive periodic gifts from the donors (or a substantial gift under the estate plan) and can fund scholarships, grants, and donations to other worthy causes of interest to the donors and the donors' family. The establishment of a private foundation normally begins with a substantial gift of cash or property. It requires adherence to a strict set of governing principals, and significant organizational paperwork in order to receive the required tax exempt status from the state and federal taxing authorities. The private foundation is a suitable mechanism for more substantial gifts.
No matter the motivations for giving, philanthropy can be simultaneously personally fulfilling and financially advantageous, thereby leaving a legacy that reflects one’s values and priorities while also providing a long-lasting financial benefit to one’s estate all at the same time.