Charitable Giving With Your Estate Plan
If you wish to leave some of your estate to charitable institutions, then a gift from your retirement accounts can have tremendous advantages. There are many ways to benefit your favorite charity both now and at your death. If these charitable gifts are done properly, you can receive tax advantages now, and save your heirs taxes later.
1. Distributing Appreciated Assets with a Low Basis
Did you buy stock or other assets at a low price? Do you own stock that has increased in value with no way to trace what was your original purchase price? Giving stock and other highly appreciated assets with a low basis can be a great way to support your favorite charity. As the donor, you are able to claim the charitable deduction for the value of the gifted assets. The charity, meanwhile, can accept the gift and cash it out without paying taxes. This gift benefits your favorite charity and avoids capital gains taxes on the appreciated assets.
2. Gifting your Required Minimum Distributions from Your IRA
Another option to support your favorite charity is a gift during your lifetime by making a Qualified Charitable Distribution, also known as a charitable IRA Rollover. Individuals who are age 70 ½ or older can direct their annual required minimum distributions (up to $100,000) from an IRA to a charity tax-free. However, the payment must be made directly to the charity to qualify for this tax-free distribution. While the individual distributing this gift from an IRA doesn’t receive an income tax charitable deduction, they also don’t have to recognize the distribution as taxable income. If you are already making gifts to a charity each year, this can be a way to benefit your charity and reduce your taxes at the same time.
Just remember you cannot take the distribution into your bank account first! The gift must go straight to the charity from your IRA. The advice of a CPA will ensure you do this properly.
3. Making Your Charity the Beneficiary of your Traditional 401(k) or IRA
Your contributions to your traditional 401(k) or IRA are pre-tax money. You, or an individual inheriting the IRA from you, will pay taxes when they withdraw the funds. If you have a beneficiary on your retirement accounts who is 10 years younger than you, they will have to withdraw all of those funds within 10 years of your passing. If giving to charities is part of your plan, then making the charity the beneficiary may be the better plan, tax-wise. Naming a charity as a beneficiary means they will pay no taxes on the distribution of that traditional retirement account. Note: be careful when you have both individual beneficiaries and charities on the same IRA, as there can be unintended tax consequences when you do so. Consult with an attorney or CPA to avoid any issues.
4. The Donor-Advised Fund
Donor-Advised Funds offer a simple way for you to benefit a variety of charities during your life and beyond. A donor-advised fund can be established with, for instance, a community foundation. In our state, the Arizona Community Foundation is one choice for a donor-advised fund. The donor can give cash or securities to the fund. He or she receives an income tax charitable deduction for the year of the donation. The donor designates the charities that they want to receive the benefit of their donation – or they can designate the types of charities rather than specific charities. A donor-advised fund can be used for a gift from your estate after your death as well.
5. Charitable Remainder Trust
A charitable remainder trust allows the donor to give assets to an irrevocable trust that then provides income for one or more individual beneficiaries (even you and a spouse), and at the end of a specific time period, or on the death of the beneficiaries, the remainder of the assets are given to charity. This type of trust can
be another method to gift highly appreciated assets. The trust will permit the donor to claim an immediate charitable deduction for the value of the assets that will ultimately pass to the charity. The donation also avoids the capital gains taxes on any appreciated assets.
If you are interested in charitable planning for your estate, our office can help. Call the Law Office of Libby Banks (LibbyBanks.com) for an appointment to discuss the options at 602-375-6752.