You might want to build charitable giving into your estate plan to support causes that you care about, reduce estate taxes and create a lasting legacy of philanthropy. To do this, you must include provisions such as bequests in your will, set up charitable trusts, or designate charities as beneficiaries of retirement accounts or life insurance policies. Here’s what you need to know.
A financial advisor can guide you in setting up a charitable trust or including bequests in your will.
Leave Money to a Charity in Your Will
Leaving money to a charity in your will is a common way to support your favorite causes. This philanthropic gesture not only benefits the charity but can also provide relief from any federal estate taxes. By including a charitable bequest in your will, you can allocate a specific amount of money, a percentage of your estate, or even particular assets to the charity of your choice.
To include a charity in your will, start by clearly identifying the charity you wish to support. It is important to use the charity’s full legal name and provide its tax identification number. Next, decide the type of bequest you want to make. You can opt for a specific bequest, which allocates a particular sum or asset to the charity, or a residuary bequest, which designates a portion of the remaining estate after all other bequests, debts and expenses have been paid.
Consulting with a financial advisor or an estate planning attorney is highly recommended when drafting your will. These professionals can help ensure that your bequest is structured correctly and aligns with your overall estate planning goals.
Contribute to Charity With a Rollover From Your IRA
Contributing to charity with a rollover from your IRA, known as a qualified charitable distribution (QCD), is an effective way to support causes you care about while potentially enjoying tax benefits. A QCD allows individuals aged 70½ or older to donate up to $105,000 in 2024 directly from their IRA to a qualified charity. These distributions can satisfy your required minimum distribution (RMD) for the year and are excluded from your taxable income, which can be advantageous for those looking to reduce their tax liability.
To execute a QCD, first ensure the charity you wish to support is eligible to receive tax-deductible contributions. This typically includes 501(c)(3) organizations but excludes donor-advised funds and private foundations. Next, instruct your IRA custodian to transfer funds directly from your IRA to the chosen charity. This direct transfer is important; if the distribution is made to you first and then donated, it will not qualify as a QCD and will be included in your taxable income.
Create a Charitable Remainder Trust
A charitable remainder trust (CRT) is a financial tool that allows you to support charitable causes while also receiving income and tax benefits during your lifetime. This irrevocable trust involves transferring assets into the trust, which then provides income to you or other beneficiaries for a specified period. After the term ends, the remaining assets are donated to the designated charity. This structure not only supports your philanthropic goals but also offers potential tax deductions, reduced estate taxes and capital gains tax savings.
To establish a CRT, begin by selecting the assets you wish to contribute, such as cash, stocks, or real estate. Once these assets are transferred to the trust, the trust can sell them without incurring capital gains taxes. This allows the trust to reinvest the proceeds into income-generating assets. You then receive regular payments from the trust, which can be either a fixed amount (annuity trust) or a percentage of the trust’s value (unitrust). The income you receive is subject to tax based on the type of income generated by the trust’s investments.
Name Charities in Your Life Insurance Policy
Naming charities as beneficiaries in your life insurance policy allows your policy’s death benefit to go to one or more charitable organizations. This approach can honor your philanthropic intentions without affecting your estate or requiring significant changes to your existing financial plans.
To name a charity as a beneficiary, start by contacting your life insurance provider to obtain a beneficiary designation form. On this form, you can specify the charity’s full legal name and its tax identification number to ensure the funds are directed correctly. You can choose multiple charities or name a single organization as the sole beneficiary. It’s essential to inform the chosen charities of your decision, as this helps them plan for future contributions and provides an opportunity to confirm the necessary details.
Bottom Line
Incorporating charitable giving into your estate plan is a common way to ensure that your legacy reflects your values and continues to support the causes you care about. You can do so through bequests, charitable trusts, or life insurance beneficiary designations.
Tips for Estate Planning
- A financial advisor can help you create a plan to manage and distribute your estate. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Estate planning can be complicated when you have to manage a large estate. To ensure you have everything you need, read up on the essential estate planning tools for wealthy investors.
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