Incorporating charitable giving into your estate plan

By Linda Yang | Senior Wealth Strategist, Citizens Private Wealth

Considering your charitable giving goals in conjunction with your estate plan is a great way to support the causes you care about while remaining tax efficient. Here we'll explore several options for effectively integrating charitable gifts into an estate plan to maximize estate and income tax benefits while also fulfilling your legacy goals.

Donor advised funds (DAFs)

Rather than donating assets directly to a charity, you may want to consider a donor advised fund. DAFs are sponsored by charitable organizations that allow you to contribute money or other assets into an account and then later direct payments to the charity of your choice.

Because the donation is irrevocable, it is considered a completed gift that you can deduct in the current year. Contributions become the property of the sponsoring organization, but the donor is generally able to name the organizations who receive distributions. This provides an added degree of flexibility because you can donate to a DAF even if you haven't yet decided which organizations you want to support or the specific timing and amount of support you want to give. You can fund the DAF now and decide later how and where you want to direct grants.

Assets contributed to a DAF during your lifetime are removed from your estate and will not be subject to federal estate taxes. A DAF can also receive assets at your death via beneficiary designation, or as instructed by your will or trust. Assets directed to a DAF at death will reduce your taxable estate.

Cash donations to a DAF are tax-deductible up to 60% of your adjusted gross income (AGI) while deductions for donations of appreciated securities are limited to 30% of your AGI. Donors can also contribute private stock and other complex assets but will typically need to have a valuation completed by an independent appraiser to determine the size of the deduction. Appreciated assets must be held for more than a year, otherwise the deduction is limited to cost basis. Charitable contribution deductions that exceed the AGI deduction limits for the current year may be carried forward for up to five years.

Private foundations

In contrast with public charities, private foundations are charitable entities that receive funding exclusively through private donations. These are typically established and managed by individuals or families.

Because private foundations are qualified 501(c)(3) charities, contributions to them are tax-deductible. In comparison with a DAF, private foundations allow for greater control over how funds are managed and distributed. This means your family can stay involved in charitable work on an ongoing basis, either by directly funding and operating a project or by providing financial support to other organizations. Your private foundation can exist in perpetuity, allowing your philanthropic legacy to continue long after your passing by empowering future generations to continue making a meaningful impact.

Deductions of cash donations to a private foundation are limited to 30% of the donor's AGI, while deductions of appreciated public securities are limited to 20%. Note that the tax deduction for non-cash or private stock donations is limited to the donor’s cost basis, making a DAF a more suitable charitable entity for these assets. Tax compliance and rules for maintaining a private foundation’s 501(c)(3) status are more complex than with DAFs. This often requires professional tax and legal oversight. Finally, unlike most DAFs, private foundations do have minimum annual distribution requirements of 5%.

Split-interest trusts: Lead vs. remainder

Split-interest trusts are a great way to balance your family's needs with your charitable goals. They are called split-interest trusts because income distributions during the trust term and the remainder assets upon trust termination can be split between charitable and non-charitable beneficiaries.

Charitable lead trust (CLT)

With a charitable lead trust, a charitable beneficiary receives regular distributions during the trust term, which can be a specified number of years (up to 20) or the life of the donor. Depending upon the trust's structure and formation, the donor may receive a tax deduction based on the present value of annuity stream to the specified charity. However, the donor typically pays the tax liability on trust income and capital gains. When the trust terminates, the remaining assets are transferred to the trust beneficiaries.

This might be a good choice for someone who doesn't need current income, is charitably inclined and is looking to mitigate estate or income taxes but still desires some level of assets to be transferred to family or other loved ones.

Charitable remainder trust (CRT)

Charitable remainder trusts similarly support charitable and non-charitable beneficiaries and provide a current tax deduction based on the expected remainder interest that will be transferred to charity. You or another non-charitable beneficiary receive income from the trust for the specified term and the remaining assets are later transferred to a charitable beneficiary when the trust terminates.

This arrangement might be beneficial to those with charitable goals that still need regular income from their assets, such as retirees. Donors with highly appreciated concentrated stock positions may find this structure particularly attractive. When assets are donated to a CRT, the donor receives a current tax deduction. Once inside the CRT, appreciated assets can be sold, but because this is a tax-exempt entity, the CRT does not pay upfront capital gains on the sale. However, capital gains and other taxable income realized within the CRT are taxable to income beneficiaries as distributions are made. This still allows a donor to accomplish charitable goals while mitigating the tax impacts of selling down and diversifying concentrated stock exposures.

Understanding the donor’s income and estate tax exposures, cash flow needs and the assets that will be used to fund the split-interest trust will determine which structure or structures may best achieve the donor’s charitable goals.

The zero estate tax plan

The goal of a zero estate tax strategy is to minimize or completely eliminate the taxes that would be paid by estates that exceed the lifetime federal estate and gift tax exemption amounts. For families facing a potential estate tax liability, this can require careful planning and taking full advantage of lifetime estate and gift tax exemptions by making strategic gifts during your lifetime or leaving charitable bequests to reduce the value of your taxable estate.

Determine the right charitable structures for you

There are many ways to incorporate charity and legacy goals into a combined estate planning strategy, and the best choice depends on your goals and circumstances.

A private wealth manager can help you develop a customized plan, identifying the ideal charitable structures based on your values and family dynamics to reduce taxes and maximize the value of your gifts. But it doesn't stop there. Tax laws, your family situation and even your own goals may shift over time. All of these things require you to monitor and update your estate plan to ensure you continue to follow the best approach. A Citizens Wealth Manager can help you through every step of the process.

Schedule a consultation to discuss how to incorporate charitable giving into your estate plan for tax efficiency and legacy fulfillment.