This is the sixth of a six-part series on building a comprehensive estate plan designed to protect you and your heirs for many generations to come.
As our mantra states, “Today’s Plans Become Tomorrow’s Legacy.”
Part 1 - Building a Road Map for Estate Planning and Financial Success
Part 2 - Team Building: Original building of estate planning team
Part 3 - Risk Management
Part 4 - Core Documents and Essential Components to a Comprehensive Plan
Part 5 - Customization of Trusts
Part 6 - Legacy Component.
Enjoy the series, and as always, we welcome your feedback. Our goal is to equip you with the insight and information you need to have confidence that you have designed and implemented a solid estate plan.
Part 6 - Legacy Component
Charitable giving and philanthropy can be a big piece of how you shape your legacy. While legacy planning accounts for many different things, we will focus on the charitable piece of your plan in this article.
Many questions arise when discussing charitable giving as part of an estate plan with so many options for giving and complicated tax policies.
What is the best way to make a significant and impactful gift to charity as part of a well-designed estate plan?
Should you give the money now or later?
Should I make donations in cash or in-kind (stocks, bonds, real estate, jewelry, art, etc.)?
This guide will scratch the surface of some of the significant charitable giving techniques and provide recommendations on the subject of philanthropy.
Charity vs. Philanthropy
What is the difference between charity and philanthropy?
Charity helps solve an immediate need, such as feeding the hungry or providing shelter for those in need. On the other hand, philanthropy helps to eradicate or make a significant permanent change to the problem.
For example, philanthropy may focus on a cure for cancer, as opposed to charity which can help cancer patients buy needed clothing or care during their treatment.
Steve Gunderson, former president of the Council on Foundations, put it: “Charity tends to be a short-term, emotional, immediate response, focused primarily on rescue and relief, whereas philanthropy is much more long-term, more strategic, focused on rebuilding. “
Present Gifts vs. Future Planned Gifts
Present gifts are what you think of when someone donates to a nonprofit. They are immediate, solving here-and-now issues standing between a nonprofit and its mission.
A planned gift is a contribution to charity arranged in the present and allocated at a future date, usually through a will or trust upon your passing. There are many sophisticated techniques like a charitable remainder trust or a charitable gift annuity that allow you to give a gift to charity while also keeping a stream of retained income for yourself inside.
Often planned gifts provide a very favorable current income, gift, and estate tax benefit while allowing you to time out the contribution to charity in the future. The gifts can be irrevocable (non-changeable) or revocable (where you can change part or all of the gift if you so choose).
The following is a list of the more common strategies that may be part of your estate plan.
Split-Interest Gifts: In general, the split is between a charitable beneficiary and a non-charitable beneficiary. To obtain maximum tax benefits, you must follow the IRS/IRC very specific rules. The following are the major pre-approved split-interest gifts:
Charitable Remainder Trust (CRT). A CRT is a trust that provides a retained income (minimum of 5% per year) to you for life or a number of years not to exceed 20 years. At the end of the income term, the balance passes to your favorite charity (this eliminates your estate tax as the funds go to charity). There is usually a charitable income tax deduction upon funding of this type of trust. Often funded during your life to obtain the charitable income tax deduction or, in the alternative, it can be commenced after your passing pursuant to your Will or Revocable Trust.
Charitable Gift Annuity (CGA). A CGA is very similar to a charitable remainder trust. However, the charity that issues the annuity manages the funds. It also provides the recipient with the income for a period, with the remainder staying with the issuing charity.
Charitable Lead Trust (CLT). Often referred to as an upside-down charitable remainder trust because the lead interest goes to your favorite charity or charities, with the remainder passing to your family (or, in rare cases, back to yourself). The big difference is that this is not a tax-exempt charity; therefore, the custom design of the Charitable Lead Trust is essential to obtain the appropriate tax savings that you wish to receive. Jackie Onassis made the testamentary laddered charitable lead trusts famous. This creativity was not enjoyed by her heirs, who figured a way to circumvent using her plan.
Pooled Income Fund. Infrequently used alternative to a charitable remainder trust. A pooled income fund allows you to pool your charitable donation with others and receive what the fund earns (this lacks customization of the CRT and the CLT).
Outright Gifts with Significant Retained Control: The following charitable gifts do not have a retained or split-interest but, they do provide you, the donor, with some significant control over the management and distributions from the charitable tool:
Community Foundation. With a community foundation, you give them your donation, and they manage your funds on your behalf. The foundation subsequently distributes your funds upon your request or according to a pre-arranged plan. Community foundations and charitable gift funds provide flexibility in your estate plan by allowing you to easily change the charities you leave your money to without amending your estate plan. For example, first, you leave ten (10) percent to your local community foundation (Community Foundation of Collier County or Collaboratory, formerly Southwest Florida Community Foundation). Next, you fill out the forms at the foundation, which outlines which charities will receive your contributions. You can change the names of the charities from time to time without the involvement of your counsel. These organizations can also help connect you to local organizations that match the goals of your legacy!
The most popular type of fund is a Donor Advised Fund - this provides the greatest control.
Charitable Gift Funds. A Charitable Gift Fund is a Donor Advised Fund at a financial institution instead of a community foundation, available at most prominent financial institutions.
Private Foundations. If you plan to leave a great deal of assets to charity, you may wish to create your own tax-exempt organization to perpetuate your unique charitable interest(s). Building a foundation is a complex undertaking, and the private foundation has significant prohibited transactions which need to be understood before pursuing this option.
Support Organization. A support organization is somewhat of a hybrid between your private foundation and public charity. Rarely used and again complicated to establish and maintain.
Charitable Gifts of Retirement Account Funds. Retirement accounts are funded with pre-tax dollars and are just waiting for taxes in the future upon distribution. In some cases, you can use contributions to charity to avoid taxes altogether. See Qualified Charitable Distribution below.
Here are a few ideas on IRA distribution planning:
*Keep in mind the SECURE Act changed the playing field, and now, most individuals that receive an IRA must take out all of the IRA within ten short years instead of over their lifetime.
Qualified Charitable Distribution. The IRS allows you to contribute up to $100,000 a year of your IRA directly to your favorite charities without bringing it into your taxable income first. This contribution satisfies your required minimum distribution and results in a much lower adjusted gross income (AGI) (advisors use AGI for other income tax calculations).
Charitable Remainder Trust as the recipient of IRA. While only allowed at this time of your passing, the CRT may be the beneficiary of your IRA. Then, the CRT can spread out the distributions to your heirs over 20 years (or their lifetime) instead of 10 short years. A careful analysis of the pros and cons is essential.
This is just the tip of the iceberg of charitable planning. It takes a collaboration of yourself, your advisors, and the charity to create a lasting legacy.