Article written by: Debra H. Sherman, CTFA
No matter your reason for charitable giving, a thoughtfully planned out and implemented strategy can help you minimize both income and estate tax liabilities, as well as maximize the impact of your giving.
The federal government taxes transfers of wealth you make to others, both during your life and at your death. Reducing the value of your estate through charitable giving can assist in avoiding or limiting transfer taxes in many instances depending on the size of your estate. In 2019, the federal gift and estate tax is imposed on transfers in excess of $11,400,000 with a top rate of 40 percent. There is a separate generation-skipping transfer (GST) tax that is imposed on transfers made to grandchildren and lower generations. You may also be subject to state transfer taxes. Due to the changing nature of tax laws, understanding the scope of these taxes and exploring estate planning options with a team of experienced professionals is critical.
Bequests by Will
The easiest and most direct way to make a charitable gift is through an outright bequest of cash in your will. Making a bequest requires instructions in your will that name the charitable beneficiary and designate the amount.
Naming Charities as a Beneficiary of an IRA or Retirement Plan
If you have funds in an IRA or employer-sponsored retirement plan, you can name your favorite charity as a beneficiary. This can provide double tax savings since the charitable gift will be deductible for estate tax purposes, and the charity will not have to pay income taxes on the funds it receives. This can save taxes that otherwise could eat up a substantial portion of your retirement account.
Establishing a Charitable Trust
Another way to make charitable gifts is through a charitable trust – the most common of which include the charitable lead trust and the charitable remainder trust.
A Charitable Lead Trust pays income to your chosen charity for a certain period of years after your death. Once that period is up, the trust principal passes to your family members or other heirs. The trust is known as a charitable lead trust because the charity gets the first, or lead, interest.
A Charitable Remainder Trust is the reverse of the charitable lead trust. Trust income is payable to your family members or other heirs for a period of years after your death or for the lifetime of one or more beneficiaries. Then, the principal goes to your favorite charity. The trust is known as a charitable remainder trust because the charity gets the remainder interest.
Each method of charitable giving has a multitude of factors to consider given your unique situation, as well as varying costs to consider. Our experienced team at Domani Wealth can help make philanthropy a key part of your financial and estate plan. Please contact us to schedule a time to discuss.
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