Estate Planning And Charitable Giving

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.

How Can Charitable Donations Reduce Estate Taxes?

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.

Charitable Gifts

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.

Beneficiary Disclaimers

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.

Charitable Lead Trusts

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

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.

Lifetime Gifts

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.

What Are the Main Types of Charitable Giving?

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:

• Cash – Cash donations are one of the most common forms of charitable giving, as they are easier for both donors and charities. Monetary donations are usually best made through checks or credit cards since they are easier to document this way.
• Assets – High-value assets like real estate, cars, and boats can be useful to certain types of charities. For example, a nonprofit that provides transportation for cancer patients could use donated cars.
• Securities – Many charities accept securities like stocks, bonds, and mutual funds as donations.
• Real estate – When donating real estate, the size of the deduction is typically based on how long the property has been held. Short-term assets (held for less than one year) have a deduction equal to the lesser of the property’s fair market value or cost basis. Long-term assets have a deduction equal to the fair market value.

Can an Estate Deduct a Charitable Contribution?

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:

• Eligible charity – Only donations made to eligible charities listed in IRC 170(c) may be deducted.
• Contribution authorized by governing instrument – The estate plan document must specify that payments to charity may be made. If the document does not mention these payments, the donations may not be deducted for income tax purposes.
• Sourced from gross taxable income – The donation is only deductible if the amount was paid out of gross income during the tax year.

Can You Donate to Charity Instead of Paying Capital Gains Tax?

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.

Learn More from Our Estate Planning Lawyers

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.