Estate planning may not be the most glamorous aspect of managing your wealth, but it can prove to be the key to maximizing your giving. Choosing the right tools and vehicles means that you get to keep more of your money—and give it away as you see fit. Estate planning and charitable giving go hand in hand.
These strategies for increased giving will help you minimize taxes on your gifts and chart a new path into a prosperous and generous financial future!
Donate Appreciated Assets (Instead of Cash)
Cash donations are typically the first to spring to mind when charitable giving opportunities arise. Writing a check simplifies giving without the need for preparation with a tax or financial advisor. But some thoughtful consideration may reveal a different path forward that benefits you and the charity. In lieu of cash, giving appreciated assets offers a more profitable option.
For example, you can donate appreciated assets or real estate to a charitable remainder trust or a donor-advised fund. The trust can then manage the sale of the real estate, allowing you to bypass the capital gains that would have otherwise eaten into your bottom line. Plus, you get to claim a charitable income tax deduction for the full fair market value of the asset, minus any retained value. Not to mention, the charity gets to keep the largest gift.
Everyone wins when you fully think through your donation strategy!
Set Up a CRT, DAF, or Both
Estate planning requires forward-thinking and preparation for unexpected life events. Charitable remainder trusts and donor-advised funds both present opportunities for more tax efficiency and purposeful giving.
Charitable remainder trusts allow you to deduct up to 60 percent of your adjusted gross income for cash donations (30 percent for other assets). Contributions remove assets from your taxable estate, allowing your beneficiaries to avoid probate and taxation on these assets upon your passing. All assets in the CRT have protection from creditors and lawsuits. Plus, beneficiaries can receive a guaranteed payout for a set term or for their lifetime.
Donor-advised funds are equally powerful for tax efficiency. Instead of naming a charity upon the creation of a CRT, donor-advised funds allow you to make contributions now and recommend the grants to specific charities down the road. You get an immediate tax deduction (or can bundle tax deductions for years to come) while enjoying tax-free asset growth.
While they might seem contradictory, you can use a financial strategy that implements both. Use your charitable remainder trust for the guaranteed payout benefits, but name a DAF as the charitable beneficiary to grant more flexibility in philanthropic interests in decades to come.
QCDs
Qualified Charitable Distributions (QCDs) can be a great method to maximize charitable giving. If you are over age 70 ½, you have the option to transfer up to $115,000 each year from your IRA to an IRS-qualified charity of your choice. The donation moves directly from an IRA to the charity, never touching your bank account and never counting as part of adjusted gross income. This is huge.
QCDs can be helpful for those over age 73 who must take required minimum distributions. These RMDs are included in your AGI, which could push you into a higher tax bracket. Instead of taking RMDs, you can use QCDs instead to satisfy the requirement without impacting AGI.
Choose Beneficiary Designations Strategically
When setting up a long-term wealth plan, keep in mind that charities will not pay income tax. At the same time, remember that your human heirs do pay income tax. Plan for the management of your taxable accounts to minimize taxes paid by your children or grandchildren, which could gobble up the gift you meant for them to have.
How does this work in practice?
Work with your financial advisor, but you typically do not want to leave a Roth IRA or a brokerage account to a charity. The former is tax-free, and the latter receives a step-up in basis at death. Children who inherit these assets will generally inherit them tax-free.
On the other hand, you may want to make a charity the beneficiary of a traditional IRA or a 401(k). If the next generation inherits a traditional IRA, they will be required to pay ordinary income tax on every dollar they withdraw. In contrast, charities that inherit these assets get to keep all the money completely tax-free.
Deciding who gets what at the end of your life requires careful thought and planning. This is why working with a financial and tax planner can prove beneficial, allowing you to make generous gifts to your loved ones and the charities near and dear to your heart.
Schedule Your Strategy Session with Magellan
Preparing for the future and implementing purposeful giving into your wealth planning requires a special touch. Magellan offers all the services you need under one roof for an integrated plan that encompasses financial, tax, legal, and estate planning. Don’t delay one of the most important decisions of your financial life.
Contact us today to schedule your consultation with one of our experts to ensure you maximize the benefits of charitable remainder trusts and other savvy money moves!
For a comprehensive review of your personal situation, always consult with a tax or legal advisor.
This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group.