Author: Brooke Smithberg, Director, Trust Services
The estate planning process involves deciding how your assets such as savings, investments, real estate, and other personal property will be distributed after you pass away. These assets are often left to heirs. However, if there are causes you are passionate about, you can choose to continue supporting those causes by including charitable gifting in your estate plan. Doing so not only supports nonprofit organizations working to strengthen your community, it could also have potential tax benefits.
Getting started is as easy as establishing your personal gifting “mission” and developing goals. Research the types of nonprofit organizations you want to give to that align with the causes you care about. It’s also important to think about how much you want to give, how often and to what extent you want to involve your family. After establishing your “mission,” your wealth management team may be able to help you identify what gifting strategy makes the most sense for you. In this article, we share the benefits of four different charitable gifting approaches that may help you meet your goals.
One of the simplest ways to give to charity is to give cash gifts to organizations you want to support. You can set a goal to give a certain amount on a regular basis or make a one-time donation. Gifting to qualified charitable organizations may qualify for a charitable contribution deduction against your income taxes. It’s important to note if you want to claim your gift on your taxes, it must be a qualified organization. For example, gifts to individuals, foreign charities and certain private foundations may not be deductible. You can learn which types of non-profits are deductible by using this resource from Charity Navigator.
Instead of taking the required minimum distribution from your IRA, you have the option to make a qualified charitable distribution. A qualified charitable distribution is a distribution from your IRA made directly to a qualified charity. Owners of IRAs who are at least 70 ½ years old can contribute some or all their IRAs to charity. This distribution can count toward your required minimum distribution and is not treated as taxable income if the funds are going to a qualifying charity. Qualified charitable distributions do have specific requirements, so talk to your financial advisor to see if this strategy is right for you.
A donor advised fund (DAF) is an account that is managed as an investment portfolio for charitable purposes. A DAF allows for greater flexibility regarding how much you give or which organization you give to (if it is a qualifying charitable organization). Additionally, with a DAF, you may qualify for an immediate tax deduction for your contribution regardless of how much you distribute out of your DAF. When deciding which charitable gifting strategy is best for you, your wealth advisor may recommend a DAF if you have an event which creates a large income tax obligation in a year, such as selling a business. If this is the case, you may benefit from a larger immediate tax deduction as opposed to smaller deductions for ongoing annual giving. Your wealth management firm may be able to help you open a DAF and manage your account to make charitable gifting easy.
Charitable trusts are a great way to make charitable giving part of the legacy you leave behind. With one type of charitable trust, a Charitable Remainder Trust, you can set money aside in your lifetime and when you pass away, you can give the remainder of the money in the trust to one or more charities. This can be a particularly effective tool for anyone holding appreciated assets with low tax basis. With charitable trusts you may receive a partial tax deduction of your contribution based on the amount of the eventual gift. A charitable trust can also create a lifetime stream of income and may reduce the amount of taxes your estate has to pay when you pass away. A second type of charitable trust, a Charitable Lead Trust, is set up for a predetermined period of time, commonly 10 or 20 years. The charity or charities named in the trust agreement receive the interest payments over the predetermined period, and upon the expiration, the remainder is distributed to designated non-charitable beneficiaries.
There are numerous types of charitable trusts and your wealth management advisor may be able help you decide which type of trust best aligns with your goals.
If you plan on gifting large amounts and want to be heavily involved in the gifting process, you may want to establish a private foundation. Private foundations are a great way to give back while involving your family in your charitable gifting legacy. Private foundations may also offer immediate tax benefits, like a DAF. It’s important to note, however, that private foundations have more administrative responsibilities and requirements.
Incorporating charitable gifting into your estate planning process will help ensure the causes you care about and supported in the future. Once you’ve determined what your personal mission is and what your charitable goals are, talk to your wealth management firm to discuss which charitable gifting strategy will best meet your goals.
About the Author
Brooke Smithberg is a Director with the Wealth Management group at FNBO and handles the administration of trusts, estates, conservatorships, agencies, and investment management accounts. Brooke's clients include high net worth individuals requiring investment and trust services.
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