How to Include Charitable Donations in Your Estate Planning

Category: Estate Planning

 

How to Include Charitable Donations in Your Estate Planning

When you begin writing your will or trust, you’re probably going to think about what you want to leave to your family first. However, some people also consider leaving a donation to a non-profit that they care about. Maybe there’s a cause that is meaningful to you and your family, or maybe you want to give back to a charity that helped you in your time of need. Whatever the case, it’s valuable to know how to go about including a charitable donation as one of your last wishes.

There are several different strategies for leaving money to charities while also minimizing your taxable estate (since charitable donations are exempt from gift taxes). We’ll go over some of those strategies below.

Charitable Remainder Trust (CRT)

We’ve discussed irrevocable trusts on this blog before, so you may already know that this type of trust is exempt from estate taxes. This is obviously beneficial for you and your family, and you can also make the trust beneficial for your favorite charity by making it a CRT. When you have a CRT, you place assets into the trust that can provide income for you for either the rest of your life or another amount of time that you’ve specified. After your death (or the amount of time that you’ve specified), the remainder of the assets in the trust will be donated to your chosen charity.

One particularly nice thing about a CRT is that it can include many different types of assets, including stocks, bonds, mutual funds, and even real estate (which can be heavily taxed if it’s not included in a trust). And, because you’re making a charitable donation, you should also get a significant income tax deduction.

Charitable Lead Trust (CLT)

Charitable Lead Trust (CLT)

 

A CLT is another type of irrevocable trust that allows you to name both a charity and another beneficiary as the recipients of the asset. You will specify that the charity receives a specific percentage of the assets in the trust for a set period of time (for example, 20 years, or until the death of your spouse), at which point the remaining assets in the trust will go to another beneficiary that you’ve named (such as your daughter or son).

This type of trust often helps affluent individuals contribute to a charity of their choosing while also avoiding gift and estate taxes on the remaining assets that go to their beneficiary. Because the charity is taking a percentage of the trust’s assets every year, the value of the trust will likely decrease over time, meaning that the amount left for the beneficiary may be below the exempt amount for estate and gift taxes. However, if the value of the trust assets actually increases over time and the amount left at the end of the specified period is above the exempt amount, your beneficiary will still have to pay taxes on the assets.

Pooled Charitable Trusts

Charitable remainder trusts and charitable lead trusts are good choices for people who have many valuable assets and want to avoid estate taxes, but for the average Floridian, putting assets into a pooled charitable trust may be a better choice. Pooled charitable trusts are set up by non-profit organizations, rather than individuals, and allow people to donate money, stocks, and bonds (as long as they are not tax-exempt).

Pooled Charitable Trusts

As with other types of charitable trusts, you can specify the amount of time you want to continue donating to the charity. During this time, the charity will pay you or a beneficiary you have named a certain amount that is based on your annual contribution and how well the non-profit is doing at the time (higher financial earnings for the charity mean a higher return for you or your beneficiaries). The money that you get back will be factored into your taxable income, but you are allowed to defer the payment (for example, many people choose to defer payments until they retire and use the money from the pooled charitable trust to supplement their income).

After your death, the charity that you’ve been donating to will receive the total balance of your gift—without those assets having to go through probate. Pooled charitable trusts can also be a good way to avoid capital gains tax if you own an asset that is likely to appreciate in value, such as property or stocks.

Setting up or contributing to a charitable trust can be a great way to minimize your taxes, leave more to your beneficiaries, and support a cause that you care about, but you need to be strategic about the assets that you place in the trust and the instructions that you leave for their use. Work with an estate planning lawyer to ensure that you’re getting the maximum benefit from your charitable donation.

About the Author:

Christopher Q. Wintter is the founder of Wintter & Associates, P.A. and a board-certified expert in Trust and Estate matters by the Florida Bar. With more than 24 years’ experience as a practicing attorney, he also serves as an instructor and faculty member for the National Institute of Trial Advocacy (NITA)—the nation’s leading provider of legal advocacy skills training to practicing attorneys—and has earned the AV® Preeminent™ rating with LexisNexis Martindale Hubbell. He was also selected for inclusion in Florida Super Lawyers for 2011 and 2012 in Estate and Trust Litigation.