Building a Legacy: Charitable Contributions as a Part of Your Estate Plan

As an estate planning practice, we meet with a lot of individuals and families that want to focus on building wealth and developing strategies that will protect loved ones in the future. Often, looking to the future turns the conversation to the subject of building a legacy. Each person, regardless of wealth, property, or notoriety, will leave a legacy behind when they pass. If you don’t take the time to cultivate it, this legacy will end up being a story by default -- what do others say about you based on what you’ve done? If you take the time, however, to take control of your narrative, you can build a legacy that tells your story the way you want it to be remembered and that can pass your wisdom and values down for generations to come. 

One of the best ways to begin shaping your legacy is to think about what is important to you. Of course, family is usually top of the list for our clients. But what about the wider world? What are you passionate about? Many of our clients use charitable giving is a way to leave a legacy of helping others, and there are many ways to structure these gifts that can stretch your generosity and even benefit your own family in the process. 

Choose a Cause You Are Passionate About

If there is a cause (or multiple causes) that you are passionate about, there are many different ways of bequeathing a gift as a part of your estate plan to benefit your favorite charities. You can list them in your revocable trust, designate them as beneficiaries on your accounts, create special split-interest funds, or purchase a life insurance policy on a charity’s behalf. Each of these methods (among many, many others) reduces the size of your taxable estate, which can limit estate taxes where applicable and improve the efficiency of the probate process. 

How Has the New Tax Bill Changed Charitable Giving

In December 2017, President Trump signed into law the Tax Cuts and Jobs Act, which overhauled a significant portion of the US tax code. Under this new law, the standard deduction for individuals was nearly doubled: from $6,350 to $12,000 for individuals, and from $12,700 to $24,000 for couples filing jointly. This raised big concerns for charitable organizations because they fear that the increased standard deduction will reduce the incentive for annual charitable giving.

Under this new tax law, individuals and families that make annual charitable contributions may want to reconsider how they structure their charitable giving. For example, to make the most of the tax deductions still available, it may make sense to group annual giving that would normally be spread out over years into a large donation in a single year. This could be done either through one lump sum donation to a charitable organization every few years, or by making a large gift to donor-advised fund, which can then be distributed to multiple charities over years.

Incorporate Planned Giving Into Your Estate Plan

Under the new tax law, now is a great time to revisit your legacy and planned giving with an estate planning attorney. An experienced attorney can work with you to identify your legacy goals and help you choose the right form of charitable giving for you:

Naming a Charitable Organization in Your Will

Leaving assets to a charity in your will is certainly the simplest way to include charitable giving in your estate plan, but it may not be the best option for you. Although charitable giving in a will does reduce the value of the estate for estate tax purposes, it does not reduce income taxes or help keep assets out of probate.  In probate, the will is public and all bequests are open to contest from the decedent’s family and heirs. Wills that make large charitable contributions are often contested by the family because they believe that more should have been left to them. Contests can cause delay, increased legal costs, and conflict within the family. Giving to charities outside of probate avoids the possibility of legal challenges and eases the process for those assets that do pass through probate. 

If you do decide to leave money to a charitable organization in your will, however, make sure you have the correct name of the charity, as well as the address and tax ID number, included in the will so that there is no confusion or mistake about the intended beneficiary.  

Designating a Charitable Organization as a Beneficiary on Accounts

Assets such as retirement plans, bank accounts, and life insurance policies are transferred upon the account holder’s death in accordance with beneficiary designation forms. These forms, usually completed when the account was opened, take precedence over a will or trust and allow the asset to be transferred immediately outside of the probate process. These forms are relatively simple to complete and can be updated at any time. If you choose to designate a qualified charitable organization as the beneficiary on a retirement plan, bank account, or insurance policy, you can simply update the form with the new beneficiary. When you pass, the value of the asset will simply transfer to the charitable organization, and the organization will receive 100% of the asset value because no taxes will be owed.

Creating a Split-Interest Fund to Benefit You and a Charitable Organization 

A split-interest fund is a way to provide for a charitable organization while retaining an interest in your assets while you are alive. There are a number of ways to set up a split-interest fund, but the most common ways are either a Charitable Remainder Trust or a Charitable Lead Trust.

A Charitable Remainder Trust allows you to create a trust that benefits both a designated charitable organization and yourself:

●      Donor opens a Charitable Remainder Trust and funds it

●      Donor takes a charitable deduction in the year the trust is funded

●      Decide on a term for the trust (usually a set number of years or the lifetime of the donor and donor’s spouse)

●      Decide on the income beneficiary (usually the donor) and how the beneficiary will be paid (distributions are either a fixed annual payment or a percentage of the trust value)

●      Choose a charitable organization as the designated beneficiary. This organization will receive the remainder of the trust at the end of the trust term (either the donor’s death or the end of the set number of years)

●      By placing assets in an irrevocable trust, the donor reduces the total value of his or her taxable estate

●      Donor can avoid capital gains on appreciated assets (stocks, real estate) by transferring them into the Charitable Remainder Trust

A Charitable Lead Trust is set up in a similar way to the Charitable Residual Trust, although it operates in the inverse. The trust makes annual distributions to a designated charitable organization beneficiary over a certain period of time, and then the remaining principal is distributed to the donor’s heirs.

Setting Up a Donor-Advised Fund to Stretch Charitable Giving Over Time

A Donor-Advised Fund can be set up through a mutual fund, brokerage firm, or community-based institution. This form of charitable giving allows the donor to retain a bit more control over how funds are used once donated. In general, managing institutions will have a minimum donation requirement (usually $5,000) to set up a Donor-Advised Fund. However, this is another example of how donors can use the new tax law by grouping donations into a single year in order to benefit from the tax deduction:

●      Set up and fund a Donor-Advised Fund through a managing institution

●      Donor takes an immediate tax deduction in the year the contribution is made

●      Managing institution will often charge an administrative fee

●      Donor makes recommendations as to how the managing institution should distribute assets from the fund over years, including specific charitable organizations or causes that the donor wishes to support

●      While determining which charities to support and as funds are distributed over years, the fund assets are invested and grow tax-free

●      Donor can avoid capital gains on appreciated assets

●      Donor can name successors on the account, so loved ones can continue to make recommendations about which charities and causes to support 

Using Your Retirement Benefits to Help Others

If a donor is over the age of 70.5 and is receiving mandatory distributions from his or her retirement account, it is possible to make tax-free contributions called Qualified Charitable Distributions (QCD). Distributions (up to $100,000 of the required minimum distributions) can be made directly to a qualified charity. Although the retiree donor cannot take a tax deduction when making donations this way, he or she will not have to include the donated distribution as taxable income for the year.

Purchasing a Life Insurance Policy for the Benefit of a Charitable Organization

As mentioned above, life insurance policies are one of the assets that can be transferred using a  beneficiary designation form. At any time, the owner of a life insurance policy can update his or her beneficiary designation form to name a charitable organization as the beneficiary for a policy. However, there are also other ways to use life insurance to support causes or organizations that are important to you.

Life insurance policies with face values over $1 million will often allow you to add “riders,” that can pay 1-2% of the policy’s face value to a qualified charity of the policyholder’s choice. In general, these riders do not cost any extra and do not reduce the death benefit of the policy for your beneficiaries. To add a charitable gift rider to a life insurance policy, talk with your insurance provider and the charity you would like to support. Not all charitable organizations are able to accept a life insurance policy.  

It is also possible to donate an entire life insurance policy, although this is slightly more complicated than the previous options. When gifting an entire life insurance policy to a charitable organization, the charity will receive the full face value of the policy upon the death of the insured. This sizeable donation can significantly reduce the value of a taxable estate, and it is possible that annual premium payments may be deductible.

Meet with an Estate Planning Attorney to Begin Crafting Your Legacy of Giving

At Stewart & Gordon, our experienced Colorado estate planning attorneys are passionate about helping our clients craft legacies that encapsulate their values and priorities. If you are interested in learning more about incorporating planned charitable giving into your estate plan, please give us a call at (303) 337-2400.