September 12, 2022
Incorporating charitable giving into your estate plan may allow you to save money on taxes while allowing you to contribute to a cause you are passionate about. Before donating, it is important to understand the various strategies involved with estate planning and charitable giving. Ideally, your financial needs, and the needs of your beneficiaries should be balanced with the tax benefits of donating to charity. An estate planning lawyer can work with you to determine the charitable giving strategy that best suits the needs of your family. At Mindful Counsel, our experienced and compassionate estate planning lawyers help our clients with donations and all other estate planning matters: call us today at (480) 422-6246.
While tax savings should not be the main purpose of donating to charity, charitable contributions can be used to minimize estate taxes in several ways.
Any assets that are gifted to charity are exempt from the taxable estate, provided that the charity is a qualified 501(c)(3) nonprofit organization. No estate taxes are levied on these donations and there is no limit on the amount that may be donated to charity. Estate owners could leave their entire estate to charity and would not owe any estate taxes if they did so.
An estate plan can include stipulations that allow beneficiaries to disclaim part or all of their inheritance, opting instead to leave these assets to charity. The beneficiaries can be granted the right to choose a charity to donate to if they wish.
A charitable lead trust (CLT) is an irrevocable trust that makes ongoing donations to one or more charities for a set amount of time. This timeframe could be up to 20 years or the life of the estate owner. When the trust term ends, the remainder of the assets in the trust are given to non-charity beneficiaries – often family members.
Charitable remainder trusts are the opposite of charitable lead trusts. This tax-exempt irrevocable trust donates income to one or more noncharitable beneficiaries for a specific period. Once that period expires, the remainder of the trust is donated to one or more charities. Assets are first donated into the trust and then may be paid out annually, semiannually, quarterly, or monthly. The time frame of the trust may either be 20 years or the lifetime of one or more of the noncharitable beneficiaries.
Making donations to nonprofits and charitable organizations during your lifetime reduces the total value of your assets, which reduces the size of your estate. Currently, the Internal Revenue Service assesses estate taxes for estates valued at 11.2 million. Shrewd use of these lifetime gifts can help avoid estate taxes if the estate was previously valued higher than 11.2 million, but the lifetime gifts brought this figure lower.
You can learn more about how lifetime gifts and other charitable donations can reduce estate taxes by discussing estate planning and charitable giving with the estate planning lawyers of Mindful Counsel.
Deciding to donate to charity is an admirable thing to do, but many donors are unsure of what they should donate. Generally, donations fall into one of the following four categories:
The Internal Revenue Service (IRS) has set guidelines for charitable contributions made from estates and trusts. These guidelines differ significantly from the charitable contribution deduction rules for individuals and corporations. Charitable deductions for estates and trusts are only allowed if the following three requirements are met:
Charitable contributions can be used to significantly reduce capital gains tax liability. To take advantage of this strategy, the estate owner must donate long-term appreciated assets that have increased in value since the time of purchase. The fair market value of these assets may be deducted, and the capital gains tax can be minimized by up to 20 percent.
Assets that are subject to capital gains taxes include both investments (such as stocks and mutual funds) and hard assets (such as real estate). Both publicly and non-publicly traded assets are included. Donating appreciated stock that has been held for at least one year can allow the estate owner to avoid paying any capital gains taxes on these holdings.
Whether you are developing an estate plan for the first time or looking to update your current plan, it is important to consider all of your options. A strong estate plan should ensure that your loved ones and other beneficiaries are taken care of and that your assets are distributed according to your wishes. If you have questions related to estate planning and charitable giving or any other estate planning matter, the team of dedicated estate planning lawyers at Mindful Counsel is here to help: call us at (480) 422-6246 to discuss your estate plan today.
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