Article by Jennifer McCloskey

Many of us have a bucket list. For those of us that do, we invest endless hours dreaming about and planning for those days when we can check adventures, locations, and experiences off our bucket lists. For some of us, we dream about going to exotic places like Machu Pichu or the Maldives. For others, the bucket list consists of adventures closer to home like riding a horse or becoming a grandparent. No matter what the items on your bucket list are, the one thing is for sure… completing your estate plan is not likely one of them.

For many, completing an estate plan is tantamount to coming face to face with our mortality, which is an emotionally challenging experience. However, with the right lens, advice and education completing your estate plan could be an opportunity to plan your legacy instead of planning for death. It is possible for our values to transcend our life expectancy. Estate planning has the power to impact our families and society in ways that last for generations after our death, fuel our passions, while simultaneously having immeasurable benefits for us while we are alive. This is where estate planning and philanthropy unite. Philanthropy is defined by the Oxford dictionary as “the desire to promote the welfare of others, expressed especially by the generous donation of money to good causes.” Philanthropy, in the context of estate planning, is often referred to as planned giving. According to Giving USA’s annual report for Philanthropy in 2020 and 2021, between individual gifts, bequests in wills and trusts, foundations and corporations, approximately “$471.44 billion dollars were donated to U.S. charities in 2020” and despite the pandemic, charitable donations grew in 2021 to approximately “$484.85 billion dollars.” Yes, it is true that “you can’t take it with you when you go” but we have complete control over our legacy, and we can direct the use of our assets once our physical beings have departed our loved ones.

Planned-giving takes manifests in different ways for different people. Some people invest in large-scale social impact non-governmental organizations, while others invest in non-profit organizations like no-kill animal sanctuaries, or charities that mirror their belief systems. Regardless of where you decide to invest your money. if you are philanthropically inclined, there are myriad estate planning techniques that can be implemented to fulfill your legacy and improve the quality of life for others. Not only can philanthropy allow us to leave the world a better place than we found it, but many also find it emotionally and financially rewarding. Philanthropic estate planning techniques can also be instrumental in reducing potential estate tax liability, maximizing the value of inherited retirement accounts, as well as teaching younger generations your values, which can result in multi-generational charitable giving. If you are philanthropically motivated, below is a list of techniques that will maximize your estate plan and serve as the foundation for building your legacy.

OUTRIGHT GIFTS TO CHARITY THROUGH A WILL OR TRUST

The most clear-cut way to engage in planned giving is to leave a gift to charity in your will or in a trust. Outright gifts to qualified charities will yield a 100% tax deduction. In determining what causes you will give to in your will or trust, the most important factor is that you give to a cause or causes you believe in. You will want to identify where your passions lie. A great way to make this decision is to analyze what you support during your lifetime and plan to continue to provide that support through a charitable gift in your will or trust. In doing so, your estate will enjoy the benefits of tax deductions if the charity is considered a qualified charity according to the Internal Revenue Service. For some charitable giving, there may be donation limitations and restrictions on the receipt of assets other than appreciated stock or cash, so you will want to consult with a legal or tax professional to ensure that your postmortem charitable gift will yield your desired effect. Typically, non-profit medical organizations, art organizations, animal organizations, educational and research institutions meet the criteria for a qualified charity. The Internal Revenue Service has a charitable organization database that can be easily accessed for free if you are curious whether the organizations you are passionate about will yield a tax deduction from an outright gift through a trust or a will.

LIFETIME GIFTING PROGRAMS

Another very common technique people use for planned giving is through utilizing the annual exclusion. Each taxpayer in the United States, in 2022, can take advantage of making tax-exempt gifts up to $16,000 annually. Married persons can gift up to $32,000 annually through a technique identified as gift splitting. Annual exclusion gifts can be made to as many trusts, individuals, or charitable organizations you are inclined to give to. For families that fall into the high net worth and ultra-high net worth brackets, lifetime gifting programs that maximize the benefits of the annual exclusion can be useful as a technique for spending down your estate to minimize exposure to estate tax liability. Lifetime gifting to irrevocable trusts, of low-basis assets that are likely to appreciate, can be an effective way to make income-generating gifts while removing the appreciation on those assets from your estate. It is important to remember that the annual exclusion is in addition to the federal unified estate and gift tax exemption. The lifetime federal unified estate and gift tax exemption in 2022 is $12.06 million dollars (and for married couples the exemption is $24.12 million dollars). Making annual exclusion gifts does not exhaust a single dollar of the unified estate and gift tax exemption. Combining these techniques with making lifetime and postmortem charitable donations, significant tax savings can materialize. From a behavioral tax perspective, the government incentivizes charitable giving and provides multiple benefits to those who engage in philanthropy. It is important to note that maximizing these benefits requires one to keep track of gifts, including annual exclusion, charitable, and taxable gifts throughout a person’s lifetime. To do so, form 706 should be filed for all taxable gifts made.

RETIREMENT ACCOUNT GIFTING

As a general rule, retirement accounts restrict one from making lifetime donations directly from the account to a charitable organization. If a person is younger than 70 ½ years old and wants to give their retirement income to a charitable organization, they would need to take the required distribution from their retirement plan, pay the taxes on the income, then make an after-tax charitable gift. However, if you are 70 ½ or older, the Internal Revenue Service permits qualified charitable distributions up to $100,000 to be made directly from an Individual Retirement Account (“IRA”) to a charitable organization. Qualified charitable distributions are made directly to the charitable organization from the IRA without paying income tax on the distribution first. Alternatively, it is relatively easy to leave retirement assets to a charity after death. When retirement funds are left to an individual, the distributions are taxed as ordinary income to the recipient. When retirement funds are left to a charitable organization, there is no probate required and no taxable income to the charity. If you desire to leave your retirement account to a charity, the beneficiary designation forms provided by the custodian of the account must name the charitable organization and the portion of the account you wish to leave that organization. If you are a married person, you will need to inquire from the account custodian whether your spouse is required to consent to this disposition of your retirement assets.

GIFTING THROUGH CHARITABLE TRUSTS

There are a variety of lifetime and postmortem charitable trust techniques available that will allow the donor to support a charitable organization of their choosing, receive certain tax deductions, and generate income on the investment. The most common charitable trusts are the charitable remainder trust and a charitable lead trust. Both of these trust techniques require the donor to create irrevocable trusts. Charitable trusts can be created in a will or during one’s lifetime through a trust instrument.

With a charitable lead trust, the charity is named as the lead beneficiary. The income generated from the trust investment will be distributed to the charitable organization for a set period. The charitable lead trust income will either be a fixed amount or a percentage. When the fixed period expires, the remaining assets in the trust, which have been preserved for the remainder beneficiary, are distributed to family or other beneficiaries. The charitable lead trust allows the donor to set the terms of the charitable contribution. The charitable lead trust has been very common over the past few years when interest rates have been at record lows. Even though interest rates are on the rise, this technique can still be quite useful for planning to reduce or even eliminate gift and estate taxes. Another added benefit of the charitable lead trust is that the donor can have either their children or grandchildren participate in the management of the trust, allowing younger generations to learn about philanthropy through a parent or grandparent’s eyes. This naturally creates an opportunity to bridge gaps between generations and for bonding over a worthwhile cause.

On the other hand, the charitable remainder trust places the charitable organization in the second position. The benefits to the donor for settling a charitable remainder trust include saving on capital gain tax, receiving a charitable deduction for the value of the remainder interest, receiving an income stream for a set period, and the possibility of avoiding estate tax by removing the asset from your estate prior to your death. The charitable remainder trust allows the grantor to keep a stream of income during life as the lead beneficiary. At the end of the period, the remainder beneficiary, the charitable organization, will receive the assets rather than family members. While these trusts can be extremely helpful as tax savings tools that allow the donor to provide substantial support to those charitable organizations, they feel passionate about, it is important to remember that the charitable trust, whether it be a lead or remainder trust, is a very technical instrument that will require the advice of a legal and tax professional during the drafting and administration process.

To learn more about ways you can incorporate philanthropy into your estate plan, reach out to a tax or estate planning professional that you trust. Opening the door to philanthropy can serve as a gateway to establishing your legacy.