Only two out of every thousand people, or .014%, of all people who die this year will have their estates subject to federal estate taxes. One of the consequences for a number of the remaining 99.986% of us is that the estate tax reducing benefit of charitable contributions is lost if made by a will. No estate tax due, no need for an estate tax charitable deduction. Most of my clients’ reaction is, “so what.” Their motivation for making charitable donations in their wills is based on far nobler reasons.
But what if you could have your cake and eat it too? There are ways to make that charitable donation and still have the benefit of a tax deduction either for the will maker or a beneficiary of a will. Here are three of those ways.
Use your retirement account.
If you are wishing to make a gift at death to a charity and tax-deferred retirement funds are part of your assets, use the retirement funds to make the charitable gift at your death. Your remaining beneficiaries will receive the same size gift but will pay less income tax or none at all. This is because retirement funds (normally taxable at time of withdrawal by beneficiaries) passing to a charity are not subject to income taxes.
Ask your beneficiary.
Instead of designating a gift to a charity in your will, leave the amount you wish to donate to your spouse or close family member instead and ask, in your will, for the recipient of the gift to make the charitable gift for you. The recipient is not obligated to follow your wishes, but in making the gift will gain the benefit of the charitable deduction.
Donate to a community foundation.
Donor-advised funds, like Austin Community Foundation, allow you to make a meaningful gift now, take a tax deduction for the value of the gift, then have significant ongoing influence over how the funds are gifted to charitable organizations over time. With many donor-advised funds, you can influence how the funds are invested and you can arrange that your family members have ongoing influence over gifting decisions from your donation after you are gone.
Charitable trusts are another mechanism for making sizable charitable deductions during your lifetime. You do not get a tax deduction for the full amount of your gift, but you or your heirs get something of value in return.
All of these options, as what you would expect with any planning effort involving the Internal Revenue Code, have a level of complexity that makes it advisable to check with your estate planning attorney or tax advisor before proceeding.
For more general information:
Leaving IRA Money to Charity: A Tax-Smart Strategy
Gifting Your Retirement Assets To Charity
Austin Community Foundation
I worked with Mr. Gagen on writing and getting my will done. I would highly recommend him as he did a great job laying out all options and explaining what all my options were. He would call me frequently to help me with everything that I needed. Him and his wife were very nice and great people to work with. If you’re looking at getting your will done I would recommend you reach out to Mr. Gagen to get it done. I’m very happy that I went with him.
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