Your Estate Plan And Charitable Giving
Charitable giving as part of an estate plan can be beneficial for the charity, the owner of the estate, and beneficiaries of the estate. By incorporating charitable donations into an estate plan, someone can show financial support to the causes they believe in while potentially benefiting from lower taxes. Determining the best course of action, and determining a perfect nexus between an estate plan and charitable giving, is a complicated process that depends on the specific assets, needs, and desires of the person creating the estate plan.
How to Make Charitable Gifts Part of an Estate Plan
Those who are looking to incorporate charitable giving into their estate plan have several options. Each option has its own tax implications, which should be considered during the estate planning process. While tax benefits may not always be a primary motivation for charitable giving, awareness of these tax implications can help maximize the financial amounts the charities and other beneficiaries of the estate receive.
Charitable Bequests as Part of a Will or Living Trust
A charitable bequest can be added to a will or trust and is a simple way to contribute to a cause while reaping certain tax benefits. The bequest is a donation of any amount made in the name of a charity, nonprofit organization, foundation, or trust. Those considering a bequest as part of their estate plan and charitable giving have the following options:
- General – A general bequest is a monetary gift paid out of the general estate assets.
- Specific – Specific bequests are gifts of a specific monetary amount or item from the estate, such as a valuable family heirloom.
- Demonstrative – Demonstrative bequests are donations of monetary sums from specific parts of the estate, such as an investment fund or bank account.
- Residuary – A residuary bequest is a donation of the remainder of the estate after paying administrative fees, creditor claims, and any other type of bequest.
Charitable bequests can be made for all forms of money and property and there is no federal limit on the number of charitable bequests in an estate plan.
Charitable Remainder Trusts
Also known as a split-interest trust, a charitable remainder trust (CRT) offers financial benefits for both the estate owner and the charity. A charitable interest trust goes into effect during the lifetime of the owner. Once the CRT is enacted, the owner begins receiving income from the trust up until their death. After the decedent has passed away, the assets in the CRT are donated to the charity of their choice.
Donating Appreciated Stock to Charity
Estate owners who have made financial gains through the stock market can financially benefit by donating the appreciated stock to charity during their lifetimes. Those who sell their appreciated stock must pay capital gain taxes but donating to charity avoids this and gives the owner a charitable income tax deduction for the full value of the stock at the time the gift was given. Additionally, the tax-exempt charity can sell the stock without paying the capital gains tax.
Qualified Charitable Distribution (QCD) – Donating Directly From IRA
The Qualified Charitable Distribution (QCD) is available to estate owners who are at least 70.5 years old. The QCD allows qualifying individuals to make up to $100,000 in charitable donations directly from their IRA each year instead of taking a required minimum distribution.
There are a few different types of estate owners who could benefit from a QCD:
- Those who must take a required minimum distribution from an IRA but do not need the money and would move into a higher tax bracket if they did take the income.
- Estate owners who want to lower future required minimum distributions can do so by lowering their IRA balance through QCD donations.
- A QCD donation can benefit estate owners who want to make a larger donation. While other charitable gifts have a limited AGI deduction of 20-60 percent on average, there is no AGI limit on QCDs.
The New York estate planning lawyers at the Jennifer V. Abelaj Law Firm are prepared to help families determine if a QCD could be beneficial to them.
Naming a Charity as a Beneficiary of Retirement Assets
Estate owners have the option to name a charity as the beneficiary of any portion of non-Roth retirement accounts. Because charities are tax-exempt, they can withdraw the donation from retirement accounts without paying income taxes. Conversely, individual beneficiaries of the retirement account (such as family members) would be required to pay income taxes on distributions from the account.
The SECURE Act gives estate planners even more incentive to include charities as beneficiaries of the retirement accounts, while naming individual beneficiaries for other assets. This law requires most beneficiaries (other than a spouse, child, or disabled person) to withdraw all IRA funds within ten years of the account owner’s death, rather than stretching distributions out over a longer period. This has the potential to cause tax complications depending on the facts and circumstances of the IRA funds.
Charitable Giving and Estate Taxes in New York
State laws should be taken into account when constructing an estate plan. While federal tax laws have implications for estate plans in any part of the country, estate tax laws vary significantly from state to state. In New York, those who own estates valued at over $5,930,000 (as of 2021) should be aware of the estate tax cliff and how this could impact their estate plans.
According to the New York Department of Taxation and Finance, the 2021 estate tax exemption is $5.93 million and any amount over that number is subject to the estate tax. For example, an estate valued at $7 million would be subject to an estate tax on $1,070,000 of the estate. This tax rate varies depending on the size of the estate. High-value estate owners can avoid this tax through the Santa Clause provision, which is a type of charitable bequest that donates the amount of the estate in excess of the exemption to charity, but only if that amount is less than the estate tax that would be due.
How Lawyers Can Help Families Establish an Estate Plan and Charitable Giving
For many families considering charitable giving as part of their estate plan, legal guidance may be beneficial. An experienced estate planning lawyer can make sure all documents are in order and help families determine the types of charitable giving that would best fit their needs. Consider visiting with the estate planning lawyers at the Jennifer V. Abelaj Law Firm at 212-328-9568 to learn more about how to integrate charitable giving into your estate plan.
