When you start the process of estate planning, your main goals may include avoiding probate, protecting generational wealth, and ensuring that your spouse, children, or other family members are cared for in your absence. You might also consider legal options like wills and trusts, along with directives for healthcare, guardianship, and funerary concerns.
There are also estate tax considerations. Many assets can be placed in a trust to avoid probate and ensure they go directly to beneficiaries, but not everything can be placed in a trust. You may want to keep some financial accounts separate for easy access.
You could face unwanted tax liabilities if you place certain retirement accounts in a trust. Tax-free health savings accounts can’t be placed in a trust. There are several options available when you create your estate plan, but not all can help you avoid taxes.
What about charitable giving? If you’re interested in philanthropy, especially as part of your end-of-life plan for distributing wealth, it’s important to understand the potential benefits to your overall estate plan.
Tax Advantages of Charitable Giving
Charitable gifts offer tax advantages not only during your lifetime but also when estate planning takes effect. Making philanthropy part of your estate plan could be as simple as bequeathing gifts to charities of your choice.
You could also set up a donor-advised fund (DAF) or consider trust structures such as an irrevocable trust, a charitable lead trust (CLT), or a charitable remainder trust (CRT), depending on your goals. Retirement accounts may be another great option for charitable giving at the end of your life, especially if you’re concerned about the estate tax burden on your heirs.
DAF
A donor-advised fund offers income tax deductions if you contribute during your lifetime, but it can also provide inheritance tax advantages. Many people find this option attractive because they can recommend grants to preferred organizations when the DAF is funded.
Establishing a private foundation is another option, but this will be managed by a board of directors or trustees, removing some measure of control over how funds are distributed.
CLT or CRT
A simple trust can be established to funnel assets to any named beneficiary, including a charitable organization. However, certain trust structures may offer greater advantages.
A charitable lead trust, for example, is an irrevocable trust that offers the opportunity to donate to charity during your lifetime, with remaining assets passing along to non-charitable beneficiaries such as children or grandchildren at the time of death. Although the remainder constitutes a taxable gift, the liability will be reduced.
A charitable remainder trust, also an irrevocable trust, is essentially the opposite of a CLT. It provides you with income during your lifetime but bequeaths the remainder of assets to a charitable entity upon death. The main advantage here is that the trust is tax-exempt, which makes it an ideal option if you want to sell stocks or real estate but defer capital gains tax to gain the greatest benefit from your investments.
Retirement Accounts
Because retirement accounts are typically not placed in trusts, they can be subject to some of the highest taxation at the time of death. For this reason, you might want to consider passing retirement assets to a charity through your estate plan to decrease the tax burden on heirs (through charitable tax deduction) while maximizing contributions to charity (as charities will not be taxed on these assets).
Planning for Charitable Giving
There are plenty of opportunities to give to charity as part of your estate plan. Choosing the best options will depend on your assets and goals.
Are you looking for an estate tax planning professional in Orange County, CA, to help you determine the best ways to donate to charity? Contact OC Wills & Trust Attorneys to create a personalized plan suited to your unique needs and preferences.
