Charitable Giving as Part of Your Estate Plan

As the holidays approach, it’s a good time to consider charitable giving as a potential part of your estate plan.  Giving provides a sense of personal satisfaction, and it can be beneficial from a financial planning perspective.  Charitable Giving as Part of Your Estate Plan

If you’re one of the 2% of Americans currently subject to the estate tax, planned charitable giving can be a powerful estate planning tool. Even if estate taxes aren’t an issue for you, charitable giving can still provide a satisfying opportunity to leave a financial legacy.  And a well-planned gift can maximize its benefits to you and the charity.

Usually when people leave a gift to a charity as part of their estate, it’s an organization they’ve had significant contact with during their lifetime.  However, it’s still a good idea to check out how the charity uses donated funds prior to planning for a substantial estate donation.   You can do this through a charity tracking organization like Charity Navigator or by asking questions directly of the charity about their use of funds, the percentage of donations that go directly to programs, and how your gift would be used.

Once you’ve selected the charity or charities, here are some of your options for gifting techniques.

Put the charitable gift 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.

Name the charity as 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.  You would use the charitable lead trust when you’re optimistic about the future performance of the investments you place in the trust.

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.  A charitable remainder trust takes advantage of the fact that lifetime charitable giving generally results in tax savings when compared to testamentary charitable giving.

However you choose to give, planning for it in advance and considering its overall impact both to your estate and the charity can provide maximum impact for your generosity.

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About the author

Jean Keener, CRPC®, CFDP®

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