Charitable Giving: Create a Legacy in Your Estate Plan

By Patrick D. Runyen, CPA/PFS, CFP®

Wealth Manager, Principal

January 28, 2022

Karen and John have done well in both their professions and their portfolios over the last 25 years. They have two children, and all four members of the family are animal lovers. Both John and Karen have become actively involved with their local SPCA. They have been so personally grateful and impressed with the institution that they have been regular financial donors, and they intend to support the SPCA through their estate.

The story of Karen and John, and others like it, are a win-win for both non-profit organizations as well as wealthy individuals. There are both financial and philanthropic benefits from incorporating charitable giving into your estate plan.  In the past, we have covered the most effective charitable giving strategies during your lifetime.  Below, we look at how you can most effectively support your favorite cause through your estate.

Specific Charitable Bequests: Easy and Flexible

Wills and living trusts are common estate documents that allow individuals to spell out their wishes before they pass away, including how their assets will be distributed.

When it comes to charitable giving, you can utilize these documents to make a specific charitable bequest at your death. You can name a non-profit organization to receive:

  • a percentage of your estate;
  • a specific dollar amount;
  • a specific asset or property from the estate;
  • the residual or remainder of the estate (i.e., after all other bequests have been satisfied);
  • a charity as a contingent beneficiary of the estate (e.g., if a primary recipient, such as an heir, is no longer alive).

Retirement Plans: Designate Beneficiaries

Accounts such as 401(k) plans, pre-tax individual retirement accounts (IRAs), and annuities can be useful tools to sock away money for your retirement while deferring federal and state income tax. However, distributions from these accounts can be subject to potential taxes for you or your heirs.

However, utilizing retirement assets for charitable giving can provide significant tax savings to you and your heirs.  If you plan on giving to charity, here are a few ways to reduce or even eliminate the future tax liability on distributions from these types of accounts:

  • Gift part/all of the retirement plan during your lifetime. This is potentially the most tax-efficient decision — especially for accounts built through pre-tax contributions — since you avoid tax on pre-tax assets, and you may also receive an itemized tax deduction in the year you make the gift! Gifting your required minimum distributions to charity during your lifetime is another effective strategy to consider (see part 4 of our charitable giving video series).
  • Name a charity as the primary beneficiary of the retirement plan. This option allows you to continue to receive distributions from your retirement plan while you are alive but would eliminate further income tax as well as potential estate taxes on the remaining account proceeds upon your death when the account passes to the named charity.

Foundations: Leave a Legacy

Private charitable foundations can also be a suitable estate planning tool for high-net-worth individuals and couples.  These vehicles allow you to receive tax deductions during your life, involve your family in your charitable goals, and leave a legacy after your passing.  Since private foundations can be a bit labor intensive, many people have recently opted for Donor Advised Funds to reduce complexity.  Refer here to learn more about DAFs.

Irrevocable Trusts: When Permanence is Financial Peace of Mind

Unlike a living trust, an irrevocable trust legally and permanently separates you from the assets placed in the trust. As a result, when you fund an irrevocable trust, you may:

  • immediately reduce the value of your estate;
  • protect those assets from potential creditors.

This separation also provides significant flexibility regarding your objectives, which might include charitable giving during your lifetime and beyond.  The most commonly used irrevocable vehicles include Charitable Lead Trusts and Charitable Remainder Trusts.

The downside with an irrevocable trust is that you give up control over those assets while you are still alive (with a living trust, you remain in control of the trust and can change its terms at any time). For these reasons, the irrevocable trust structure is best suited for people who have large estates and are confident about their needs and objectives not changing in the future.

Think About Your Legacy

The larger your estate, the more considerations there can be when it comes to estate planning and charitable giving. Perhaps the most important question you can ask is, “what is important to you?”

Our advisory team as Modera focuses on each client’s long-term financial plan and goals – including legacy wishes.   By reviewing the full financial picture, we can help you get closer to where you want to be.  Get in touch if you’d like to discuss.

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