Charitable giving can play an important role in many estate plans. Philanthropy has the potential to make a positive impact in the lives of others and give you personal satisfaction. It can also provide you with a current income tax deduction, allow you to avoid capital gains tax or reduce the amount of taxes owed by your estate upon your passing.
There are many ways to give to charity. Some people make gifts during their lifetime, while others opt to make gifts upon their death. Some make gifts outright, while others use a trust. You can even name a charity as a beneficiary in your will or designate a charity as a beneficiary of your retirement plan or life insurance policy. If your gift is substantial, you can also establish a private foundation or donor-advised fund. In what follows, we will describe the unique traits of each of these options in order to provide you with a deeper understanding of how you can make a significant impact with your estate.
Making outright gifts
An outright gift is one that benefits a charity immediately and exclusively. With an outright gift, you will get an immediate income and gift tax deduction. Be sure to confirm that the charity you are trying to support is a qualified charity according to the IRS. Get a written receipt or keep a bank record for any cash donations and get a written receipt for any property other than money.
Will or trust bequests and beneficiary designations
These gifts are made by including a provision in your will or trust document, or by using a beneficiary designation form for a retirement plan or life insurance policy. The charity receives the gift at your death, at which time your estate can take the income and estate tax deductions.
Another way for you to make charitable gifts is to create a charitable trust. You can name the charity as the sole beneficiary, or you can name a non-charitable beneficiary as well, splitting the beneficial interest—which is referred to as making a partial charitable gift. The most common types of trusts used to make partial gifts to charity are the charitable lead trust and the charitable remainder trust. It is important to remember that there are expenses and fees associated with the creation of a trust, so make sure to ask about such factors if you choose this option.
A charitable lead trust pays income to a charity for a certain period of years, and then the trust principal passes back to you, your family members or other heirs. The trust is known as a charitable lead trust because the charity gets the first—or lead—interest. A charitable lead trust can also be an excellent estate planning vehicle if you own assets that you expect will substantially appreciate in value. If created properly, it allows you to keep an asset in the family and still enjoy some tax benefits.
For example, let’s say you create and fund a $2 million charitable lead trust that provides for fixed annual payments of $100,000 (or 5% of the initial $2 million value) to a particular charity for a period of 20 years. Then, at the end of the 20-year period, the entire trust principal will go outright to your beneficiaries. Using IRS tables and assuming a 2.0% Section 7520 rate, the charity's lead interest is valued at $1,635,140, and the remainder interest is valued at $364,860. Assuming the trust assets appreciate in value, your beneficiaries will receive any amount in excess of the remainder interest ($364,860) unreduced by estate taxes.
Alternatively, a charitable remainder trust is the mirror image of the charitable lead trust. Trust income is payable to you, your family members or other heirs for a period of years, then the principal goes to your favorite charity. A charitable remainder trust can be beneficial because it provides you with a stream of current income—a desirable feature if there won't be enough income from other sources.
Private family foundation
A private family foundation is a separate legal entity that can endure for many generations after your death. You create the foundation, then transfer assets to the foundation, which in turn makes grants to public charities. You and your descendants have complete control over which charities receive grants. However, unless you can contribute enough capital to generate funds for grants, the costs and complexities of a private foundation may not be worthwhile. A general guideline is that you should be able to donate enough assets to generate at least $25,000 a year for grants.
Similar in some respects to a private foundation, a donor-advised fund offers an easier way for you to make a significant gift to charity over a long period of time. A donor-advised fund refers to an account that is held within a charitable organization. The charitable organization is a separate legal entity, but your account is not—it is merely a component of the charitable organization that holds the account. Once you transfer assets to the account, the organization becomes the legal owner of the assets and has ultimate control over them. You can only advise—not direct—how your contributions will be distributed to other charities.
The professionals at Busey Wealth Management know that making the most of your estate can be an overwhelming and difficult process, so they are here to help you prepare. To learn more or to find an advisor near you, visit busey.com/wealth-management.
This is not intended to provide legal, tax or accounting advice. Any statement contained in this communication concerning U.S. tax matters is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties imposed on the relevant taxpayer. Clients should obtain their own independent tax advice based on their particular circumstances.
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
This presentation is for general information purposes only. It does not take into account the particular investment objectives, restrictions, tax and financial situation or other needs of any specific client.
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