Trusts, Donor-Advised Funds and Family Foundations Are Effective Tools

For individuals who wish to leave a legacy that lasts beyond their lifetime, including charitable giving in their estate plan ensures that the means will exist to fulfill their wishes. A charitable giving plan can strengthen your estate plan by not only supporting causes that you hold dear, but also by reducing taxes.

Until recently, taxpayers whose estates exceeded the federal estate tax exemption often included charitable giving in their estate plans to reduce their total estate value and avoid the estate tax. But now that the federal exemption has been permanently raised to $15 million per individual ($30 million for married couples filing jointly), most taxpayers who include charitable giving in their estate plans do so out of genuine philanthropic values.

Several tools are available to help achieve your charitable giving plan, and it’s important to work with an estate planning professional who can help you select the right tools to accomplish your goals. For example:

An individual who was working with an estate planning professional decided to split his $2 million estate equally between his daughter and a favorite charity. He held $1 million in an IRA and the other $1 million in an investment agency account. He had planned to leave the IRA to his daughter and make the charity the beneficiary of the investment agency account. However, his estate planning professional pointed out that the distribution from the IRA would be taxable to his daughter, who would consequently receive only about 70% of the IRA’s value. By reversing his plan and making the charity the beneficiary of the IRA, and his daughter the beneficiary of the investment agency account, both bequests were tax-free, since charities are not subject to income tax.

This is an example of an individual having the right motivations, but almost choosing the wrong tools to accomplish his estate planning and charitable giving goals. A simple change in strategy enabled him to ensure both his daughter and his favorite charity would benefit from his estate to the fullest extent possible.

An estate planning professional will talk with you about your goals for leaving assets to your family, including a charitable giving plan or for transferring your business or farming assets. Taking a holistic approach to estate planning involves looking at all the assets, discussing with you where you want them to go and creating a plan that carries out your goals.

After creating the initial plan, the estate planner should meet with you every three to five years to review and make necessary adjustments, or sooner if major life changes (marriage, new child) or business transitions (retirement, business sale) occur.

Deciding Where to Direct Charitable Giving

  • Nonprofit Organizations

For many people, this is the most thought-provoking part of building a charitable giving plan into their estate plans — selecting the right charity or charities to receive their assets.

During our lifetimes, many of us support charities and houses of worship, and we also participate in community groups that rely on financial support from their members. We have graduated from high schools and colleges that could benefit from financial support, and our children have benefited from enrichment activities run by nonprofits, such as sports leagues and youth theater groups. You may also have a special interest or hobby such as military history or genealogy that is the focus of a national nonprofit organization. Any one of these — or a combination — could be grateful recipients of your generosity.

  • Donor-Advised Funds

A donor-advised fund (DAF) is a fund or account that is maintained by a sponsoring organization for the purpose of distributing donors’ money to nonprofit organizations. Many major investment houses and banks have donor-advised funds.

The benefit of DAFs is that they afford donors the same tax efficiency that direct donations offer, but without the decision-making. Though donors may advise a DAF how they would like their money to be distributed, the Fund has legal control over the assets and, hence, the ultimate distribution decisions are up to the Fund itself.

  • Family Foundations

There is another interesting avenue for carrying out your charitable giving plan that is beginning to gain more traction. Long associated with ultra-wealthy families with household name recognition, family foundations are being created by high-net-worth individuals who want to ensure their legacies continue to support worthy causes for many years in the future. Governed by boards that often include family members who share the values of the original donor, family foundations generally make grants to organizations, or scholarships to individuals, that align with the foundations’ purpose.

Many such foundations focus on scholarships for high school and college students and may be tied to certain schools or professions. For instance, a dentist may establish a scholarship for a student from their region to attend dental school. Or a farm owner may establish scholarships to enable more students to go into agriculture.

A foundation creates an opportunity for a family to not only pass along money to a charity, but also to pass along the history and values that were important to the family member(s) who set up the foundation. It imbues the family with a sense of purpose around the distribution of their deceased relative’s wealth.

 How to Structure Charitable Donations in Estate Plan

It’s important to bear in mind that charitable organizations, grateful though they may be for your donation, prefer to receive cash donations as opposed to hard assets. Many nonprofits actually have donation policies that restrict the types of gifts they may accept to cash or, in some cases, stocks. When donors give gifts of stock, these policies often require the stock to be cashed immediately.

Consequently, if you plan to leave a piece of farmland to an organization that fosters agricultural education among young people, you should check with the organization first to inquire about their donation policies, and possibly structure your charitable giving plan to require that the land be sold by your executor and the proceeds distributed to the agricultural organization.

Charitable Remainder Trust

Ideally, estate planning is started many years before you need it, and it’s possible that you may want a stream of revenue during your lifetime from assets that are highly appreciated property. A charitable remainder trust can make that happen.

A charitable remainder trust (CRT) is an irrevocable trust that can pay you a stream of income during your lifetime, with the remaining assets going to your designated charity after your death. Although the CRT itself is tax-exempt, a beneficiary who receives distributions must pay taxes on certain types of income that are generated within the trust. Short-term capital gains, rental income and business income are taxed as ordinary income. Long-term capital gains also are taxable at applicable rates. Tax-exempt bonds are not taxable, nor is any mount of the original contributed assets.

Charitable remainder trusts are effective instruments for retired business owners who have placed their companies inside the trust, with the trust then selling the business.  This enables the owner to avoid a large capital gains tax bill upon sale of the business, continue receiving a stream of revenue from the business proceeds, and designate any residual assets to be donated to charity upon death.

Likewise, farmers who are planning their estates and who have already depreciated all their equipment can consider placing the farm and equipment into a CRT, and then have the trust sell the farm when they’re ready to retire.

Giving for a Reason

While building a charitable giving plan into your estate plan is an effective way to minimize taxes, other strategies can achieve the same ends.

Charitable giving at the end of your life is an important way to pass on a legacy. Your life and your business are more than just assets. They are evidence of the values that have been important to you throughout your life. A charitable giving plan gives you a way to ensure that your values live on after your death.

Next Steps

If you are ready to start a discussion about your estate plan and a charitable giving plan, consider these first steps:

  • Consult an estate planning professional about taking the first steps toward establishing your estate plan.
  • Decide whether you want to have a charitable giving component in your estate plan. If so, communicate that to your estate planning professional.
  • Additionally, communicate your wish to the person who will serve as your personal representative (or executor) after your death. If you have a trust and you are listed as the trustee, be sure to have contingent trustees listed who would be responsible for administering the trust upon your death.
  • Have a discussion with your loved ones, including your spouse, children and other family members with whom you are close, and make sure they understand what is important to you in terms of the disposition of your estate. This needn’t be a who-gets-what discussion at this stage. Rather, it should be an overview discussion to let them know you are thinking about your estate and that you are working with a professional estate planner.

Questions?

Building a charitable giving component into your estate plan requires advance thought and planning. If you are ready to start the discussion, contact an Adams Brown Trust advisor.