Leaving a charitable donation in your estate plan is an amazing way to leave a legacy and positively impact the community or an organization that matters to you. Philanthropic donations are an integral part of your estate planning, but how do you navigate between what you allocate to your heirs and what you bequest to charity? Below are two things to consider when thinking through your charitable giving in estate planning.
Donation Approach
There are numerous ways to donate to charity. You can donate one lump sum, gift a fixed asset like real estate or create a foundation for long-term impact. Some individuals choose to set up one of two kinds of charity trusts:
Charitable Lead Trust: Provides a specific amount of the trust’s income to a chosen charity, with the remaining income going to the beneficiaries. If your primary objective is donating to charity, this is the trust for you.
Charitable Remainder Trust: Essentially, the opposite of the Charitable Lead Trust. This type of trust provides payments to the beneficiaries in specific amounts and the remaining goes to charity.
Tax Implications
Which accounts you leave to charity and your heirs may not be at the top of your concerns in estate planning, but in all honesty – it should be. Certain bequests are impacted differently by taxes depending on which beneficiary acquires that money. For example, a Traditional IRA will be fully taxable to your heirs, while a Roth IRA or life insurance policy is likely to have substantially different tax implications. Yet, a tax-exempt charity doesn’t have to pay taxes on the money it receives – ever – regardless of what kind of an account the donation came from.
This makes being selective about who inherits what accounts is very important in your estate plan, as it can drastically impact your family’s inheritance. An estate planning attorney can help you navigate these implications to create a tax strategy that works best for everyone you care about.
We highly encourage incorporating donations into your estate plan. Your gift can make an incredible impact on a cause or organization that matters to you. However, we know the importance of considering the tax implications and how best to establish a lasting legacy. We are here to help you create an estate plan that will make a long-term impact on both your loved ones and your philanthropic missions. Contact us today to get started on a plan that works for you!
