Providing for a cause that is close to your heart can be very fulfilling.
Giving back to the community by preserving historic sites & places, green space, and our cultural heritage are notable examples. And while legacy giving is not a new concept, it is a mandatory pillar of a thoughtful and comprehensive philanthropic portfolio that every donor should consider in order to have a comprehensive giving plan.
Thus, the reason for the launch of the Heritage Foundation of Williamson County’s 1799 Society (named after the year Williamson County was created by the Tennessee General Assembly).
Incorporating charitable giving into your estate plan requires careful consideration of your charitable objectives, family needs, and income requirements. Current tax laws provide valuable tax benefits for individuals, trusts, and estates that donate to qualified charities. The income and estate tax regulations governing charitable gifting can be simple or complex depending on the details surrounding the gift. Because of this, it is always wise to consult a tax advisor to aide in the process of making the most of your charitable legacy giving.
How to use your estate for charitable gifting
Some basic ways to use your estate for charitable “testamentary” gifting include:
- A bequest, via your last will and testament, of a specific cash amount or real property (residence, ranch, land, or even artwork).
- Adding the charity as a beneficiary of an annuity policy.
- Adding the charity as a beneficiary of a life policy.
- Adding the charity as a beneficiary of an IRA or retirement plan.
Each of these options allow for a reduction in your overall taxable estate upon death and thus a reduction in any transfer tax that may be owed. Assessing the needs of your heirs and your charitable goals is essential. Some inherited assets are more favorable to your heirs than others. For example, an inherited IRA or annuity does not receive any adjustment in value at time of death and the beneficiary will report taxable income on the receipt of IRA or annuity payments in the same fashion as the descendant. A qualified charity, however, does not pay tax on receipt of such income items. Thus, careful assessment of your assets and their tax attributes is needed to refine the overall estate plan.
“During Life” Gifting Strategies
Other charitable gifting strategies are more complex but incorporate both income tax and estate tax benefits. Such “inter vivos” gifts (during life) include:
- A gift of appreciated property (stock or real estate). In this scenario the donor is entitled to a charitable deduction at FMV of the subject property and avoids tax on any built-in gain. The charitable deduction may be limited but any unused portion may generally be used in a subsequent tax year. With proper planning a large charitable deduction may be used to offset recognition of other income items, resulting in significant tax savings. The donated property is now removed from inclusion in the donor’s estate. The receiving charity can then sell the property and avoid tax on the built-in gain. A win-win for the donor and the charity.
- Property may also be donated to the charitable organization, but a life estate retained by the donor. This strategy works well where the donor desires or needs continued use and enjoyment of the property but wants to ensure the property ultimately goes to the charity of choice. Ongoing property maintenance costs can remain with the donor and future appreciation of the subject property remains with the charity. A charitable income tax deduction is allowed subject to an adjustment for the retained value.
- Life insurance is a useful asset to provide estate liquidity and a means to replace or equalize the value of assets intended to benefit heirs or charity. While the death benefit of a life policy is generally tax free to the beneficiary, the value of the life policy is included in the estate of the decedent. Estate tax (currently as high as 40%) greatly reduces the potential benefit. Steps can be taken, via an irrevocable life insurance trust, to remove the life policy from the estate and provide more value to the intended beneficiaries or charity. Techniques are also available that would allow the grantor (creator) of the life insurance trust to enjoy withdrawal rights on the cash value of the life policy.
- Other trust strategies include charitable remainder trusts and charitable lead trusts. Both can be designed to provide current or future charitable benefits, reduce overall estate tax exposure, and provide current charitable income tax deductions.
A Tax-wise Route to Charitable Giving
These strategies, and others, provide a tax-wise route to ensure your charitable intentions can be accomplished. Be certain to seek tax and legal counsel on how to establish and execute the best charitable gifting strategy for you and your family. Giving back to our community is a legacy that benefits future generations. I encourage you to consider the Heritage Foundation when evaluating your charitable objectives.
Article authored by:
Brad Smith CPA ABV CVA IAR
Partner at SMITH WYND CPA