Giving to charity is often an important part of clients’ estate plans, so let’s explore some practical, tax-efficient methods of testamentary giving. And while we are at it, what about the satisfaction of seeing the charity benefit while you are alive? Is there a reason to wait if you are otherwise financially secure?
Here are a few key questions to consider when providing charitable gifts in your estate plan.
While alive and at any age, donating appreciated securities (held more than one year) can provide the benefits of a market value deduction while avoiding the capital gains tax. If you are age 70 ½ or older, you can donate directly from an Individual Retirement Account (IRA) to a charity. This can also provide the donor satisfaction seeing the benefit of their gift to their chosen charity. Elizabeth had terminal cancer and knew she had less than six months to live. Her advisor noted that the Audubon Society would receive $30,000 out of her IRA and asked, “Would you like the satisfaction of making the donation now, and not later?” She loved the idea, and it gave her pleasure during a difficult time of her life. With or without a terminal illness, giving creates a sense of well-being and provides social benefits to your community, country, or the world.
For testamentary giving (e.g., will, trust, IRA beneficiary), donating your tax-deferred assets to charity at death can be very tax-efficient. Many assets receive a step-up in basis to current fair market value at death. For example, you own a single-family rental you paid $200,000 in 1995 with an appreciated value at your death of $1,000,000. Your heirs will have an income tax basis of $1,000,000. They could sell it and pay no capital gains taxes. On the other hand, IRAs, 401K accounts, and annuities do not receive a step-up. Your heirs will have to pay ordinary income taxes as they liquidate your IRA. By contrast, a charitable beneficiary pays no income taxes on the gift. Consider making a charity a partial or full beneficiary on your retirement account instead of donating cash from your estate.
Is there a specific purpose for your gift? Upon death, Beth wanted to fund special education scholarships at a private high school. Simply naming the school as her IRA beneficiary would not suffice. She designated a community foundation as the beneficiary and provided specific instructions funding scholarships to students who could not afford the special education supplemental tuition.
In other situations, you might be comfortable with the stated mission of a charity and be happy to support that mission through unrestricted funds.
Many people feel they have sufficiently provided for their loved ones and would like to give the excess to charity. They may be unclear as to which charity or charities to fund. A discussion with your financial planner is a good first step to explore specific causes and charities. There are also many other helpful resources. You might have a local or regional community foundation (the Cleveland (Ohio) Foundation being the world’s first)1 whose professionals can help guide you in the process. Also, charity rating organizations like GuideStar or Charity Navigator are resources researching charitable organizations. Another option, you can consider is a philanthropic advisor like GiveTeam whose mission is “To help donors give more, give better, and give now.”2
Regardless of how much or when you might choose giving to charity, your Apella Wealth financial planner is in an ideal position to assist you in thoughtful, purposeful, and tax-efficient giving, during life or via testamentary provisions.
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