Summary: Giving to charity is almost always emotionally rewarding. When you include properly structured donations to a qualifying charity as part of your estate plan, you can also reap financial rewards as well. Carefully structured charitable estate planning can offer benefits with regard to income taxes, death taxes, as well as removing those assets from your probate estate.
When you
create your estate plan, you are leaving behind a legacy of your life, with
your beneficiaries representing the people and things that matter most to you.
One vital part of this process of leaving a legacy, for many people, is
charitable giving. Your estate plan can serve as one way to remember a
cherished charity, and it can also provide some additional benefits to your
family beyond helping advance the mission of the charity.
In
addition to the altruistic positives associated with giving to charitable
causes, leaving money or assets to a charity in your estate plan may also
provide tax benefits to you. Many of these tax benefits can be realized through
the use of trust planning. One option is to leave a distribution to your
favorite charity in your revocable living trust. You can also, though, create
special trusts for the purpose of leaving something to a charity.
One such
example is the charitable remainder trust (CRT). These trusts can benefit both
the donor and charity. In a CRT, you transfer an asset or amount of wealth
irrevocably into the trust. The trust's trustee manages the funds in the trust
and pays the income from that investment to you (or to the person you
designate) for a period of time you stipulate. When that period of time ends,
the wealth that the trust owns transfer to the charity you named. These trusts
can provide benefits both on your income taxes and also offer benefits with
regard to capital gain taxes if you use highly appreciated assets to fund the
trust.
A
charitable lead trust (CLT) works somewhat similarly to a CRT, only in reverse
order. You create your CLT and fund it with the assets you select. The charity
you name gets an income payout during your lifetime. When you die, the CLT's
assets transfer to the loved ones you named. These assets generally pass to
your loved ones free from any estate tax obligation.
In order
to obtain the full tax benefit of these strategies, it is important to
recognize that the IRS only recognizes certain benevolent entities as
qualifying charities. This group of charities, called 501(c)(3) entities (named
after the section of the tax code that defines the criteria for qualifying
entities), includes most churches, colleges and hospitals, in addition to
numerous others. The IRS's website has tools for researching whether an entity
is a qualifying charity.
The IRS
also has strict rules regarding how trusts and transfers must be structured in
order to qualify for tax benefits. To make sure that your charitable estate
plans function as intended and give you all the benefits to which the law
entitles you, take care to select an experienced professional familiar with
this type of planning.
This article written and published by:
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