Summary: Giving to charity is almost always emotionally rewarding. When you include properly structured donations to a qualifying charity as part of your estate plan, you can also reap financial rewards as well. Carefully structured charitable estate planning can offer benefits with regard to income taxes, death taxes, as well as removing those assets from your probate estate.
When you create your estate plan, you are leaving behind a legacy of your life, with your beneficiaries representing the people and things that matter most to you. One vital part of this process of leaving a legacy, for many people, is charitable giving. Your estate plan can serve as one way to remember a cherished charity, and it can also provide some additional benefits to your family beyond helping advance the mission of the charity.
In addition to the altruistic positives associated with giving to charitable causes, leaving money or assets to a charity in your estate plan may also provide tax benefits to you. Many of these tax benefits can be realized through the use of trust planning. One option is to leave a distribution to your favorite charity in your revocable living trust. You can also, though, create special trusts for the purpose of leaving something to a charity.
One such example is the charitable remainder trust (CRT). These trusts can benefit both the donor and charity. In a CRT, you transfer an asset or amount of wealth irrevocably into the trust. The trust’s trustee manages the funds in the trust and pays the income from that investment to you (or to the person you designate) for a period of time you stipulate. When that period of time ends, the wealth that the trust owns transfer to the charity you named. These trusts can provide benefits both on your income taxes and also offer benefits with regard to capital gain taxes if you use highly appreciated assets to fund the trust.
A charitable lead trust (CLT) works somewhat similarly to a CRT, only in reverse order. You create your CLT and fund it with the assets you select. The charity you name gets an income payout during your lifetime. When you die, the CLT’s assets transfer to the loved ones you named. These assets generally pass to your loved ones free from any estate tax obligation.
In order to obtain the full tax benefit of these strategies, it is important to recognize that the IRS only recognizes certain benevolent entities as qualifying charities. This group of charities, called 501(c)(3) entities (named after the section of the tax code that defines the criteria for qualifying entities), includes most churches, colleges and hospitals, in addition to numerous others. The IRS’s website has tools for researching whether an entity is a qualifying charity.
The IRS also has strict rules regarding how trusts and transfers must be structured in order to qualify for tax benefits. To make sure that your charitable estate plans function as intended and give you all the benefits to which the law entitles you, take care to select an experienced professional familiar with this type of planning.