With Thanksgiving and Giving Tuesday right around the corner, it is the perfect time to talk philanthropy. Estate plans are one of the most convenient and strategic ways to donate to a charity or non-profit, and one of the most important: in 2021, estate plans accounted for almost 10% of all charitable gifts in the U.S. – almost $46 billion in donations! With just a little planning, you can leave a legacy that helps change the world.
How to Make a Charitable Bequest
Leaving a charitable gift can be as simple as one sentence in your Will or Trust – all you may need is the full legal name of your charity and the amount or percentage you want to leave them. You can elaborate if there is something specific you would like your gift to be used for (ie: you’re donating to a university and want your gift to go towards a scholarship) but it’s always a good idea to check with the organization first to ensure your vision is feasible.
In lieu of writing a charitable bequest into your Will or Trust, you can simply name a charity or non-profit as a beneficiary on your retirement account. This method is quick, easy, and flexible – you can specify the percentage of the account you want the organization to receive, and the process saves a step for your executor or trustee.
The Tax Advantages
Both methods also have their own tax perks. Any charitable bequest in your Will or Trust is eligible for an estate tax deduction. Currently, there’s an estate and gift tax exemption amount of around $12 million, set to increase to almost $13 million in 2023. This is the combined amount you can gift over your lifetime and at your death without incurring gift and estate taxes.
If you risk of exceeding this limit, charitable donations are the perfect way to decrease your estate while making a positive impact – unlike gifts to your friends or family, charitable gifts are not counted towards the tax exemption amount. While $12-$13 million may seem an unreachable threshold for many of us, the estate and gift tax basic exclusion amount is poised to drop to around $7 million in 2026.
If you choose the retirement account route, you can also make the most of your money. When you name an individual as a beneficiary of your retirement account, they must pay income taxes on any withdrawal made. The SECURE Act also requires most IRA beneficiaries to withdrawal all funds from inherited retirement account within ten years of the account holder’s death – that can add up to a lot of owed income tax! In contrast, charities and non-profits named as beneficiaries on retirement accounts can withdraw assets without paying any income tax.
More Ways to Give
The financial advantages of charitable giving are not exclusively posthumous. For example, instead of withdrawing your full Required Minimum Distribution from your IRA , and paying the associated income tax, you can utilize Qualified Charitable Distributions. If you’re 70 ½ years old or older, up to $100,000 per year in donations can count towards your Required Minimum Distribution.
Donating appreciated stock is another tax-savvy move you can enjoy during your lifetime. If you sell your stock, you’ll have to pay capital gains tax on any appreciation amount; the more your stock appreciated, the more tax you will have to pay. Meanwhile, if you donate the stock you avoid capital gains tax and are eligible to deduct the full fair-market value of the stock from your income taxes.
Making a Difference
Whether it’s through your Will, Trust, retirement account, or investments; whether during your lifetime or after you pass away, charitable giving is an amazing way to make an impact and avoid extraneous taxes. By incorporating giving into your estate plan, you know you are making a difference. People donate up to six times more through their Wills or Trusts if they are reminded to think about it, according to a study by Forbes, so here is your reminder: your estate plan can help change the world!
