If you are a person who enjoys contributing to charity and wants to continue your charitable giving into the future, consider including charitable giving in your estate plan. This is a great way to demonstrate to your heirs the value of charitable giving and highlight your legacy of philanthropy.
There are several different ways to do this. Depending on your specific financial situation and goals, you could set up a charitable trust, establish a Donor-Advised Fund (DAF), make a bequest in your will, or use a different tool.
An estate planning attorney will work with you to determine the best charitable giving strategy to include in your estate plan.
Charitable Trusts
A charitable trust is just a trust that keeps the assets you choose to place in it. You name a trustee responsible for carrying out your management and investment directions. The trust pays taxes and requires the trustee to manage the assets.
There are tax benefits to setting up a charitable trust for your philanthropy, but the main reason for having such a trust is to establish a legacy of charitable giving. The trust distributes assets to your chosen charities during your lifetime and after your death.
There are two types of charitable trusts: charitable lead trusts and charitable remainder trusts. Your financial estate planning attorney will review your estate and your goals and help you decide which trust is best for meeting your financial and charitable giving goals.
Main Benefits of a Charitable Trust
The main benefits of establishing a charitable trust include:
- Reduces taxes, including income taxes, capital gains, and transfer taxes. In some cases, these tax assessments can even be eliminated.
- Generates a reliable source of income that can then be distributed to the named charities.
- Protects assets from creditors.
- Assets pass directly to beneficiaries, and the trust does not go through probate.
IRS Requirements for Charities to Qualify as Beneficiaries of Charitable Trusts
To qualify as a charity, the entity you wish to select as a beneficiary of your charitable trust must meet certain IRS qualifications. This includes:
- Churches, synagogues, and other religious organizations
- Civil defense organizations
- Fraternal societies
- Organizations that have as their sole purpose a religious, charitable, educational, scientific, or literary purpose
Selecting a Trustee
Choosing a trustee is perhaps the most crucial step in establishing a charity trust. This individual must be willing and capable of carrying out your intentions and the aim of the trust. This may include coping with difficult and outraged family members who discover the assets have been handed to charity.
The trustee must be knowledgeable to effectively run the trust while providing oversight and responsibility. The trustee is appointed to act in perpetuity and must accept this duty.
Donor Advised Funds
If you wish to have a fund that may be disbursed to multiple charities and given to them yearly, a donor-advised fund may be just what you need. There are advantages to this type of fund:
- As soon as you contribute to the fund, you receive an immediate tax deduction.
- The contributions to the fund are invested and grow tax-free.
- You have flexibility in choosing a beneficiary of a grant from the fund.
- You can contribute to the fund at any time.
- You can open the fund with any asset.
- You can name your heirs as advisors to the fund, which will continue your family legacy of charitable giving.
- The fund continues after your death, and your named advisors make the grant decisions.
There are many other advantages and disadvantages to a DAF that you should discuss with your estate planning attorney.
Bequests
A bequest is a gift made as part of your will or your trust. You leave a specific asset to a certain beneficiary. This can be as simple as leaving your car to a named grandson. It also can mean a contribution to a charitable organization of your choice. You can set it up so that a charity of your choice receives a percentage of your estate, or you can leave a specific asset or a specific amount of money to the charity.
There are generally tax benefits to the estate when you leave a bequest to a charity. In your bequest, you should leave clear and specific instructions to the executor of your will so there will be no questions about your intent to prevent challenges to the will by other heirs.
The main disadvantage of leaving assets to a charity through a bequest in your will is that the will must pass through probate. All debts must be paid from your estate before any bequests are distributed.
Leaving a Lasting Legacy Through Charitable Giving
Incorporating charitable giving into your estate plan not only helps you to continue your philanthropic efforts after your death, but it also sets a strong example for your descendants. You can ensure that your giving legacy lives on by establishing a charitable trust, creating a Donor-Advised Fund (DAF), making a bequest in your will, or using other estate planning strategies.