Paul O. Dillon, Attorney at Law

Charitable Giving and Your Estate Plan

Americans are a country of generous people. We give to organizations that we feel connected to, and we give to charities that we feel are important. We also give to honor our loved ones, to make life better in our communities and to help when disaster strikes.

Most people don’t give to charity purely for the tax benefits, but charitable giving has long been a benefit of lowering income taxes during our lifetimes, as well as helping minimize estate taxes when we die, says the article “5 Ways to Incorporate Charitable Giving into Your Estate Plan” from Kiplinger. Therefore, if you are charitably minded, why not achieve the most tax-savings you can? Here are five ways to do this.

Appreciated Stock. Gifts of publicly traded stock that has grown or appreciated in value is a good way to support a charity while you are living. If you sell appreciated stock, you will need to pay capital gains tax on the appreciation. However, if you donate appreciated stock to a charity, you’ll receive a charitable income tax deduction equal to the full market value of the stock at the time of the gift. That avoids capital gains taxes. You get the benefit on the appreciated amount, without having to sell it. The charity can, if it wants, sell the stock without paying any capital gains taxes, because registered nonprofits are tax exempt.

Charitable Rollovers. If you are older than 70 ½, you may donate up to $100,000 per year to charities directly from your IRA. This is known as a Qualified Charitable Rollover, or a QCD. The QCD counts towards any Required Minimum Distributions (RMDs) that you need to take from your IRA annually. Under the recently passed SECURE Act, in the future RMDs must be taken by December 31, 2020, after the account owner celebrates their 72^nd birthday. Because RMDs are taxable income, they are taxed at ordinary income rates.

By donating through a QCD, you can support a charity, fulfill your RMD requirement and exclude the amount that you donate from your taxable income. For those who don’t need their RMDs, that’s a win-win situation.

Bequest by Will or Revocable Trust. A more traditional way to support a charity, is to leave an amount in your will or revocable trust. The bequest is language in your will or trust that states the amount you want to leave to the charity, clearly identifying the charity you want to receive the funds, and if you want, stating the purpose that you’d want the charity to use the funds. An important point: make sure that you use the legally accurate name of the charity to avoid any confusion. This is a common error that causes no many problems for charities.

Consider also giving a donation that can be used for a charity’s “general purpose.” This lets the charity decide where to best allocate your donation, rather than tying the money to a specific program. If you chose to list a specific purpose, meet with the development office or the executive director at the charity to ensure that they are able to fulfill that desire. Otherwise, the charity may need to refuse the bequest.

Name a Charity as the Beneficiary of Retirement Accounts. This can be done by naming the charity as a beneficiary on the account documents. Be sure to use the legally correct name of the charity. The charity will be able to withdraw funds from the retirement account without paying taxes. People who receive funds from retirement accounts pay income tax rates on distributions, but charities do not. You may want to donate retirement account funds to charities, and non-taxable assets to heirs.

Charitable Remainder Trusts. This is a way to help the charity and provide for heirs. Your estate planning attorney would create a Charitable Remainder Trust (CRT) and names the CRT as the beneficiary of an IRA. A CRT is a “split interest trust,” where a person receives annual payments for the CRT for a set period of time. When the person or charitable organization’s interest in the CRT ends, the remaining funds are distributed to the charity of your choosing. There are very strict rules about how CRTs are structured, including the percentages that the charity must receive. An estate planning attorney will be able to create this for you.

Reference: Kiplinger (March 2, 2020) “5 Ways to Incorporate Charitable Giving into Your Estate Plan”

Why Do I Need an Estate Plan?

Did you know that more than half of American adults—and 78% of millennials—don’t have any basic estate planning documents like a will or living trust?

It may not be that much of a shock, since younger adults tend to put off thoughts of estate planning. However, even if you don’t have children or many assets yet, you can benefit from creating an estate plan now.

Forbes’s recent article, “6 Reasons Why You Should Have An Estate Plan,” provided six reasons why you should have an estate plan at any point in life:

1. Plan for Your Own Needs. A big step in the estate planning process, is deciding who will make decisions on your behalf, if you’re unable to do so yourself. If you become incapacitated, a revocable trust will hold assets for your benefit, while you’re alive and name the individuals you want to receive your property when you pass. Designating an agent under a durable power of attorney to act on your behalf when it comes to financial and legal matters, if you become physically or mentally disabled, can help make certain that any decisions made, are in your best interest. If you can’t make medical decisions for yourself, you should have a healthcare proxy, agent or power of attorney, HIPAA release, and living will.
2. Decide How to Dispose of Your Wealth. A will names an executor or personal representative who’s responsible for the administration of your estate after you die. He or she distributes property, as you determine in your will. If you have minor children, you can also designate a guardian to care for them in your will. Any life insurance, retirement accounts, or annuities require you to name beneficiaries, so they don’t need to be included in a will.
3. Lessen Transfer Taxes. One goal of estate planning is to maximize the wealth you transfer to your beneficiaries, along with minimizing transfer taxes. The Tax Cuts and Jobs Act of 2017 expanded the amount individuals may give away at death—or during life—without any transfer taxes. The new law offers an increased exemption amount and portability. That means spouses can share one another’s exemption. You can make annual tax-free gifts up to $15,000 in 2019 (twice this amount for married couples). You can also pay medical and educational expenses for someone else without any gift tax.
4. Include Charitable Giving. If you have philanthropic goals, an estate plan can help make certain that your objectives are satisfied. You can select a charity that’s important to you, choose the assets you want to donate, and decide—along with your attorney—the best way to make your gift.
5. Protect Family Wealth. There can also be wealth protection benefits in estate planning through asset ownership arrangements, insurance, limited liability entities, irrevocable trusts and asset protection trusts. These are designed to protect your assets from creditors. An experienced estate planning attorney can help you decide, if one of these options is appropriate for your situation.
6. Ready your Family to Receive Wealth. You can also prepare the next generation to receive wealth, which can also be helpful in preserving family wealth in the long run. Your estate plan can set out wealth planning goals, facilitate conversations about what wealth means to your family and educate your adult children about financial ideas and the ways in which they can get involved in creating and sustaining the family legacy.

Estate planning can be a formidable task, especially if you’re starting from ground zero. However, you can always engage an estate planning attorney to help you develop the documents you need to give you peace of mind about your financial affairs.

Reference: Forbes (February 22, 2019) “6 Reasons Why You Should Have An Estate Plan”