Critter Corner: What Are Some Ways to Incorporate Charitable Giving into Your Estate Plan?

Dear Hayek,

I want to include charitable giving in my estate plan, since I have some causes that I am passionate about and heard it is a good way to reduce taxes. What are some ways that I can do so?

Thanks for your help!

Chara Tee

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Dear Chara,

People give to charities for many reasons — to honor a loved one, to help a cause they feel passionate about, for tax deductions, or simply to do something good. Here are some ways to structure your charitable giving into your estate plan:

• Bequest in Your Estate Planning Documents: A simple way to benefit charity at your death is to leave a bequest in your estate planning documents. State the amount you’d like to leave to the charity, identify the specific charity to receive the amount, and state the purpose for which you’d like the charity to use the funds.
• Name a Charity as the Beneficiary of Your Retirement Account: Name a charity as a beneficiary of all or a percentage of your non-Roth retirement accounts (IRA, 401(k), 403(b), etc.). The benefit of this is that, unlike individuals inheriting an IRA, a charity receiving an IRA does not pay income taxes on those assets when they convert the IRA accounts to cash. The value of the IRA accounts will also not be part of your taxable estate.
• Give Appreciated Stock: If you have publicly traded stock (owned as individual stocks or as part of a brokerage account) that has appreciated in value, consider giving it to a charity during your life. If you give the stock to charity, you will receive a charitable income tax deduction equal to the full fair market value of the stock at the time of the gift and will avoid capital gains taxes. The charity can sell the stock without paying capital gains taxes because charities are tax exempt.
• Charitable Rollover: Individuals who are over 70½ may donate up to $100,000 per year to charities directly from their IRA. This is known as a Qualified Charitable Distribution (QCD). This QCD will count toward any required minimum distribution (RMD) an account holder must take from the IRA.
  • Under the SECURE 2.0 Act, RMDs must begin the April after the account holder turns 73 in 2023 and will increase to 75 in 2033.
  • RMDs are considered taxable income and are taxed at ordinary income rates.
  • With a QCD you can benefit charity, fulfill your RMD requirement, and exclude that amount from your income. This can be a good strategy for individuals who do not need the distribution to cover living expenses.

• Consider a Charitable Remainder Trust (CRT): You can benefit a charity and a family member by creating a charitable remainder trust (CRT) and naming the CRT as the beneficiary of your IRA. When the individual’s income interest in the CRT terminates, the remaining amount is distributed to charities of your choosing. Due to the many rules surrounding the creation and operation of a CRT, an experienced attorney is essential to create it properly.
• Consider a Charitable Lead Trust (CLUT): For a single individual or a married couple of very high net worth, the creation of a non-grantor Testamentary Charitable Lead Unitrust (CLUT) is one of the most desirable and powerful ways to minimize estate taxes without complicating your life in any way. The way the testamentary CLUT works is that upon your death, or upon the death of the surviving spouse, assets are irrevocably transferred to a trustee of a CLUT established upon your death. A CLUT can also be created during your lifetime. Read more here.

Charitable Giving and Medicaid Eligibility

When it comes to charitable giving, for the average middle-class and upper middle-class family, it’s important to keep Medicaid eligibility requirements in mind. This is especially important for those who may need nursing home care within the next five to ten years. For more details about this, please see our resource page, “Medicaid: The Perils of Gifting FAQ.”

As you can see, there are many ways to benefit charities, either during your life or at your death. For more information on charitable giving, please read Mr. Farr’s articles on the subject here.

Hope this helps!

Hayek