If you’ve accumulated significant wealth, you may enjoy setting aside a portion of your estate for a charity you are passionate about. You can even leave all of your estate to charity if you choose.
Here are several ways you can achieve your goal:
5 Ways to Leave Your Estate to Charity
1. Charitable Bequest
A charitable bequest is straightforward. It is a statement in either your will or trust that details which assets (and how much of them) you’d like to leave to a particular charity. The assets you leave to charity could be investments, cash, personal property or something else. Bequests are just gifts made as part of your will or trust and can be made by anyone and for any amount. However, you’ll want to work with an attorney to accurately convey your wishes to ensure your donations reach the charity intended and your funds are used for the purpose you desire.
In general, there’s no limit to the number of charitable bequests against the value of an estate (but you need to make sure you designate how your estate is distributed among charities), making them a powerful tool for reducing estate tax.
2. Name a Charity as a Beneficiary
Just as you can name a spouse or other relative as a beneficiary of your IRA, 401(k) or life insurance policy, you can also designate a charity as a beneficiary. To do so, just complete a designated beneficiary form for your account. Because your beneficiaries receive those retirement assets at the time of your death, there are a few tax advantages.
Charities don’t pay income tax, so the full amount designated from your retirement accounts will benefit the charity you choose, thereby maximizing your donation. While those assets given to charity will need to be included in the gross value of your estate, it’s considered a tax-deductible charitable contribution that can offset estate taxes for your heirs. But keep in mind, the vast majority of estates are not taxable under the current record-high estate tax exemption (set to $12.92 million for 2023).
While there are potential tax savings when you leave a retirement account to charity, life insurance proceeds are generally tax free. So, one strategy you can use is to leave your retirement savings to charity while leaving your tax-free life insurance policy to individual beneficiaries. Contact your financial advisor or estate attorney to understand if this is the right choice for you.
3. Donor-advised Fund
A donor-advised fund is another effective charitable giving tool. A donor-advised fund is a grant-making account held by a public charity. Essentially, it’s like an investment account for the sole purpose of donating to charities. After establishing the fund, you make donations to it, and the charity holding it agrees to consider your investment and distribution requests. The donor-advised fund handles all the financial and management tasks, which frees you from administrative legwork. You can donate cash, stocks or non-publicly traded assets (such as private business interests) to a donor-advised fund to be eligible for an immediate tax deduction.
A donor-advised fund allows you to make a large tax-deductible charitable gift in a single year without needing to identify all the charitable recipients immediately. In turn, you make grant requests to the charity that year or in any future year despite making no contribution in those future years. Upon your death, assets from your estate can be contributed to the fund and dispersed to charities you’ve designated.
Charitable Remainder Trust: This is a so-called split-interest charitable giving technique, which means a portion benefits the charity and a portion benefits you. When you transfer assets to a CRT, you retain a stream of income from the trust for a designated term. When the term expires, the remaining assets are passed on to the charity. If you create and fund the trust during your lifetime, you'll receive a current charitable income tax deduction for the present value of the remainder passing to charity at the end of the term.
Charitable Lead Trust: This is also a split-interest charitable giving technique, with a key difference from a CRT. When you transfer assets to a CLT, the charity receives a stream of income from the trust for a designated term. However, when the term expires, the assets transfer to your beneficiaries rather than to the charity. In some situations, transferring assets creates a current charitable income tax deduction for you.
5. Private Foundation
This is a charitable organization set up and primarily funded by you, your family, or a small group of donors. It differs from a public charity because it isn’t funded by contributions from the public. A board oversees contributions, investments, and distributions and grants to public charities. While it offers you as a donor greater control, it’s a significantly more complex strategy to implement than the others listed here.
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