How Do I Incorporate Charitable Donations into an Estate Plan?

Estate planning is an important part of life. There is peace of mind knowing one’s affairs are in order, and the legacy one has worked a lifetime to build is secured for the next generation. Charitable giving is an important part of a comprehensive estate plan for many people.

Incorporating charitable gifts into an estate plan is a way to continue one’s personal philanthropic goals, even in death, allowing the giver to support beloved causes and organizations for years to come. Yet, there are certain tax regulations to consider when giving to charity. Read on to learn how charitable giving fits into a robust estate plan and how to give sensibly to reap the greatest tax benefits.

Choose a Charitable Cause

The first step is selecting one or more charitable organizations that hold importance and reflect one’s values and personal beliefs. These can be anything from local community charities and religious organizations to colleges and universities.

Charitable organizations generally fall into two categories: public and private. Public charities receive funds from the public. Public charities include grants from individuals, the government, and private foundations. Public charities provide tax-exempt activities and services.

Private foundations are not affiliated with the government and generally service funds from a single source, like a person, family, or corporation. To maintain tax-exempt status, private foundations cannot ask for money from the public, and their efforts must support the public.

Select the Assets to Donate

After one or more charitable organizations have been chosen, it is time to take a closer look at the donor’s financial portfolio and identify which assets are to be donated now or in the future. Typically, all charities accept cash, but donors might be surprised to learn that some non-profits also accept other financial and physical assets, including real estate, art, and privately-held securities. It is important to always research the organization to learn more about which assets they accept.

Consider the Tax Ramifications

Various types of charitable gifts come with their own tax benefits, obligations, and restrictions. The goal with smart estate planning is always to minimize estate taxes and preserve assets, using creative strategies to leverage exclusions and credits for gift taxes.

There is no one-size-fits-all recommendation for minimizing tax benefits. It is always best to discuss one’s options with a knowledgeable lawyer who can provide insight on the tax implications of various charitable donations, based on one’s own personal situation. It is important for donors to balance their own income needs with those of their beneficiaries while meeting their own personal philanthropic goals.

Determine How to Gift a Donation

Charitable gifts take many forms, including the ones listed below.

Charitable Gift Annuities: A charitable gift annuity is a contract between a donor and an eligible charity where the donor makes a gift to the organization, and in return, the charity provides the donor and at least one additional person with a fixed monthly income. That income continues until the last remaining beneficiary passes away.

Charitable Lead Annuity Trusts: A charitable lead annuity trust (CLAT) provides an annual payment for a charity, foundation, or donor advised fund of the grantor’s choosing. Payments last over the grantor’s lifetime or a set term of years. After that, remaining CLAT assets are distributed among non-charitable beneficiaries.

Charitable Remainder Annuity Trust: A charitable remainder annuity trust (CRAT) is a gift transaction where the donor contributes assets to a charitable trust that pays a fixed income to a designated beneficiary, like a university or non-profit organization. Donors can name a charitable remainder trust as the beneficiary of their individual retirement account (IRA) to receive any remaining assets after the beneficiary interest in the trust terminates.

Charitable Remainder Unitrust: A charitable remainder unitrust (CRUT) provides an income to a designated beneficiary during the course of the grantor’s life while the remainder is donated to a charitable cause. Beneficiaries are usually members of the donor’s family.

Donor-Advised Funds: Donor-advised funds are like investment accounts created for the sole purpose of supporting charitable organizations. Donations to donor-advised funds are both irrevocable and tax deductible.

Endowments: Endowments are money and other assets that are donated to organizations and institutions to fund their operating costs. They are quite common among colleges and universities and generally support their research, teaching, and community service efforts. There are several types of endowments. Some allow the donor to specific how the funds are used. Others allow organizations to use funds as they see fit.

Private Family Foundation: This is a non-governmental private foundation funded by family assets and run by family members with the purpose of philanthropy. Private foundations are managed by their own directors and/or trustees and do not solicit money from the public.

Retirement Accounts and Charitable Bequests: Since retirement accounts are among the most highly taxed assets in a person’s estate, they are a smart option for charitable gifts. Leaving a retirement account to a charity has two main benefits. First, it reduces the tax burden on the family. Retirement funds go directly to the charity, making the estate eligible for a federal tax charitable deduction on the total value of the account. Leaving retirement assets to a non-profit organization also boosts the giving power. The charity does not have to pay taxes on donations from retirement funds.

Be Aware of Charity Scams

According to the Giving USA Foundation’s annual report, Americans gave more than $471 billion to charity in 2020. Those donations supported environmental, educational, medical organizations, among countless other causes. Unfortunately, scammers are always waiting to prey upon the generosity of others.

Charity fraud monopolizes on the human desire to support others in need, especially during the recent Coronavirus (COVID-19) pandemic. To avoid a scam, always do research before giving. Never give out personal and financial information, like a Social Security number or bank account number. Keep detailed records of any donations, and ask about how much of every donation goes to overhead and fundraising.

Additionally, never click on links in unsolicited emails and texts. These links can release malware that steals personal information. Finally, do not assume that every crowdfunding efforts are real. Anyone looking to capitalize on a tragedy can create an online fundraiser using photographs and stories taken from the media.

How Do I Find an Experienced Lawyer?

Anyone who aspires to give to charity later in life should enlist the guidance of a trusted lawyer who is knowledgeable about wills, trusts, and other estate matters. Start by asking family and friends for recommendations. Someone who had a positive or negative encounter with a specific lawyer is often the best resource. Accountants and financial advisors can also suggest firms because they often work hand in hand during the estate planning process.

Every state has a bar association, along with some local cities and counties as well. Bar associations are invaluable resources for locating lawyers by practice. Finally, check online reviews for feedback from current or past clients.

Many people make charitable giving one of their major financial goals, and there are countless ways to give. Schedule a consultation with a lawyer to learn more about the many ways to give and how this can affect an estate plan.

New Jersey Estates Lawyers at Lyons & Associates, P.C. Help Clients Incorporate Smart Charitable Giving into an Estate Plan

If you have ever considered making a worthwhile charity part of your estate plan but do not know where to start, let the New Jersey estates lawyers at Lyons & Associates, P.C. help. With so many giving options, we understand the process of setting up a trust or creating a foundation can be overwhelming. To schedule an initial consultation, call us at 908-575-9777 or contact us online. Located in Somerville and Morristown, New Jersey, we serve clients throughout Somerset, Woodbridge, Morristown, Parsippany, Rockaway, Short Hills, Chatham, Randolph, Madison, and Morris Plains.