News

5 Intentional Ways To Give Your Estate Plan A Charitable Focus

Author

Steve Pietila

Steve Pietila

View Bio >

If charitable giving has played a significant role throughout your life, perhaps you want to continue that story by leaving a legacy gift.

Your legacy should be representative of your goals, values, and mission throughout life. It’s not only what you leave behind but also the precedent you set for all that’s to come. 

Here are five ways to elevate your estate plan with a charitable tilt.

Make A Qualified Charity A Beneficiary 

Perhaps you’ve been dutifully supporting specific causes throughout your life, so much so that it’s a defining part of your financial plan. You can continue those contributions via your estate plan by naming a qualified charity as a beneficiary

You can bequeath all or a portion of your assets to the charity of your choice by making them a primary, co, or contingent beneficiary on your accounts. 

As a bonus, it’s also an extremely efficient way to pass down assets, both from a time and tax perspective. 

How does it work?

The named charity can collect the proceeds from the custodian directly without waiting for a lengthy estate settlement, streamlining the process.

Naming a charity as a beneficiary can also be a shrewd tax move because some accounts like traditional IRAs and annuity earnings have tax consequences for conventional beneficiaries. But if the funds are donated to a qualified charity, the IRS doesn’t impose an additional income tax.  

What does it take to be a qualified charity? The organization has to be registered as a 501(c)(3) with the IRS.

Establish A Charitable-Based Trust

Charitable-based trusts are excellent vehicles to bring structured charitable donations to your estate plan. Most of these options are irrevocable, meaning once it's established, it’s challenging to reverse. South Dakota is a great state to house your trust as it comes with several benefits we’ve outlined here.

Employing trusts for charitable purposes can help bring regular income to the grantor or beneficiaries and support causes you care about in a tax-efficient manner. 

There are several types of trusts available, each with different rules, regulations, and potential benefits. Before establishing a vehicle, discuss with your financial, legal, and tax advisors.

Even though there are numerous iterations of charitable-based trusts, today, we’ll introduce two of the most common: charitable remainder and charitable lead trusts.

There are two basic types of charitable remainder trusts:

  • Charitable Remainder Unitrust (CRUT)
  • Charitable Remainder Annuity Trust (CRAT)

Both of these vehicles pay out a portion of the trust’s value to a named beneficiary (you or an heir) and the remaining value to the qualified charity of your choice. With a CRUT, the income is variable, based on a percentage of the trust’s assets, and reevaluated annually. A CRAT pays out a specified amount, a minimum of 5%, each year to the beneficiary. 

The trust pays the beneficiary until the account owner passes, at which time the trustee directs the rest to the charity. 

When created appropriately, charitable remainder trusts can provide an estate tax deduction and tax savings from the charitable gift itself. 

A Charitable Lead Trust (CLT) is essentially the reverse of a charitable remainder trust. The charity of your choice receives income from the trust for a specified period; then, the remaining amount is distributed to the beneficiaries, which could include the grantor. Depending on how you establish the trust, the grantor could enjoy an income tax deduction or an estate tax deduction on the contributions. 

Trusts come with many nuances, so again, be sure to leverage the support of your financial, legal, and tax team. 

Create a Family Foundation or Scholarship

Is philanthropy an important part of your family value system?

If so, consider establishing a private foundation. 

Creating a family foundation is an excellent avenue to support meaningful causes and engage family members in philanthropic lifestyles. This is a way for your charitable efforts to tell a unique family story. 

  • What causes are you passionate about?
  • How can your foundation best support them?
  • In what ways will the foundation be funded?

These questions are simply the tip of the iceberg but can get you thinking about the specific role your foundation should play in the causes you care about and your family. 

One of the most significant undertakings will be to manage the foundation’s assets. You can enlist a family member to control them or have a third-party corporate trustee. No matter who you decide, you should provide clarity over how the funds will be used. Perhaps you’d like to see the funds go to specific charities, or maybe you’d like to leave the decisions to your family’s discretion. 

You may decide to name the foundation after yourself, offering a piece of your legacy to live on through the foundation or remain anonymous with your giving.

Foundations can also be quite tax-efficient, as you may find income tax deductions as well as a decrease in capital gains and estate taxes.

Maximize Qualified Charitable Distributions

One of the most effective charitable giving avenues for retirees is a qualified charitable distribution (QCD). A QCD is a vehicle that allows you to transfer funds from a traditional IRA to a qualified charity of your choice. 

You must be at least 70 ½ to use this tool, and you can transfer up to $100,000 per year, or $200,000 if both you and your spouse utilize the distribution.

Doing so can help maximize your donation and reduce your taxable income, as a QCD can satisfy your annual RMD quota (which you must take every year starting at 72). While many people use all or a portion of their RMDs for living expenses if you don’t need the entire distribution, employing a QCD can help you reduce your taxable income and give to meaningful causes at the same time. 

Lowering your taxable income in retirement can have a domino effect on other areas of your financial life. It could impact your eligibility for certain tax credits and deductions, including Social Security and Medicare. 

Another excellent benefit of QCDs is that you don’t have to itemize to take advantage of this strategy. There may be years when you don’t have enough deductions to itemize, given the higher standard deduction. But with a QCD, you can still donate to causes you care about and receive favorable tax treatment—a win-win!

Give Generously and Graciously

Many people find passion and purpose in giving to the places and causes that mean the most to them, like alma mater, religious space, or other charitable causes throughout their lives. By including charitable organizations in your estate plan, you extend the opportunity to continue supporting them with your legacy. 

Giving to causes that matter can be an instrumental part of your financial plan. If so, it only makes sense for you to do so most effectively and efficiently possible—for you and the organizations. 

At First Dakota Wealth & Trust, we provide you with guidance on best aligning your actions with your intentions. Some of these more complicated strategies require a team of three; an advisor, an attorney, and an accountant. Our financial advisors have connections to qualified estate planning attorneys and experienced tax preparers to ensure your ultimate goals are met in the best way possible.

Are you interested in exploring ways to connect your charitable goals with your legacy? Schedule an appointment with our team today. We’d love to help you build a plan that’s representative of your goals, values, and legacy.

Disclaimer

First Dakota Wealth & Trust is the fiduciary investment department of First Dakota National Bank with trustee powers to serve clients during their lifetime, during incapacity, and after death. We help clients develop a financial roadmap to help simplify their financial future.

Please note that neither First Dakota National Bank nor First Dakota Wealth & Trust Department, or its employees provide tax or legal advice. This is intended for informational purposes and is not intended to constitute legal or tax advice. Please consult your attorney and/or tax professional for advice related to your specific situation.