When you are contemplating the legacy that you will be leaving behind, you may consider giving to charity. Many people are passionate about certain causes, and there are those who would like to give something back to institutions that have been meaningful to them throughout their lives such as schools or hospitals.
Making philanthropy a part of your legacy can be personally satisfying, but there can also be tax advantages.
Everyone is aware of the fact that you can deduct charitable donations from your annual tax returns if the entity that you are contributing to is recognized as tax exempt by the Internal Revenue Service. However, there are also some estate tax benefits that go along with certain acts of charitable giving.
Who Is Exposed?
The estate tax is something that the majority of Americans will not have to worry about. This is because there is an exclusion in place, and it is relatively high. Only the portion of your assets that exceed this exclusion would potentially be subject to the federal estate tax.
In 2014, the federal estate tax exclusion is $5.34 million. If your assets do in fact exceed this amount, you may want to consider how you can give to charity in a way that provides you with estate tax efficiency.
Vehicles of Charitable Giving
There are various different ways that you can give to charity. Clearly, you can just donate funds directly to a charitable organization. When you do this, you get your charitable deduction, and you are reducing the value of your estate which will in turn reduce your estate tax liability.
Some people create private foundations. You don’t necessarily have to be a billionaire to create a foundation, but there are some significant administrative costs that can be incurred on an ongoing basis.
Another option would be donor advised funds. You make a donation to the fund and subsequently advise the fund with regard to how you want your donation to be spread around among qualified charities.
Donations of appreciated securities into the fund are not subject to capital gains taxation. You reduce the taxable value of your estate when you make a contribution, and you get your tax deduction.
There are also charitable trusts that can be used to great advantage if certain specific circumstances exist.
With a charitable lead trust, the charitable beneficiary receives payments over the term of the trust, and a non-charitable beneficiary that you choose inherits any remainder that may exist. A significant sum could wind up being transferred to the beneficiary tax-free if the assets in the trust outperform the hurdle rate that was applied by the IRS.
Charitable remainder trusts are also an option. With these trusts the non-charitable beneficiary receives payments over the term of the trust and the charitable beneficiary assumes ownership of the remainder.
Our office is highly experienced in charitable gifting strategies. Contact us to discuss estate planning strategies to optimize your assets, and how charitable gifting can be an integral part of your estate plan.