In the golden years of your life, it’s comforting to rest easy knowing that you made an impact not only on your loved ones but also on the world. Creating a detailed plan for how you will accomplish this is crucial because there are multiple paths to making generous charitable contributions.
Two of the most common terms floated for this process are legacy giving and planned giving, but which one is right for you?
If you want to know the differences between legacy giving vs planned giving, here’s a quick guide to help you decide which one to incorporate in your financial planning.
Legacy Giving vs Planned Giving: What’s the Difference?
Legacy giving and planned giving are the same thing. They’re simply two terms that refer to the same concept.
Both terms mean that you intend to make charitable contributions outside the span of your own lifetime. You plan to create a legacy that outlives you.
With many different routes to achieve this, your gift can go further and continue to make an impact on your local community (or the world) long after your passing. These gifts are typically larger than average because you no longer have to hold funds or assets in reserve for a rainy day.
Legacy giving is all about planning ahead for how you want to give. Instead of giving a gift on the spur of the moment during your lifetime, planned giving allows you to factor philanthropy into a long-term plan that benefits you in the here and now, as well as the charity of your choice.
Common Types of Planned Gifts
Because planning is so crucial to the process of philanthropic endeavors, there is more than one way to approach this topic. Here are some of the most common types of planned gifts to consider incorporating into your estate plan.
Charitable Trusts
Charitable trusts are a strategic way to take advantage of tax benefits in the here and now, secure a source of income for you or a beneficiary, and still have money left over for a charity or charities near and dear to your heart. The most common are charitable remainder trusts, but charitable lead trusts can also serve this purpose.
Charitable remainder trusts (CRT) donate the remainder of your trust to a charity you select once the term of income payouts ends. Meanwhile, charitable lead trusts provide charities with an annual payout from the trust, allowing for more immediate charitable giving while ultimately passing on the corpus to your heirs.
Charitable Gift Annuities
Another option is a charitable gift annuity, which serves as a contract between you as the donor and the charity you wish to support. You will transfer a cash donation or a valuable asset to the charity, taking a partial tax deduction and receiving a stream of annual income that is generally based on your life expectancy.
Donor-Advised Funds
Donor-advised funds are a unique way to incorporate legacy giving into your plan. You contribute funds or assets to the DAF now, but you do not necessarily have to bequeath them to charity right away. They can be allocated to different projects and charities in the future, in accordance with your recommendations.
After you pass away, family members and loved ones can continue your legacy with the remaining funds in the DAF. These are great for teaching the younger generations the importance of philanthropy.
One common strategy is to leverage both a DAF and a CRT in tandem. Naming a donor-advised fund as your CRT’s charitable beneficiary offers a lot of flexibility, as you don’t need to name a charity right away. You can take some time to evaluate your options while still claiming tax benefits in the here and now.
Retirement Assets
In addition to setting up new methods of giving to the charity of your choice, some people prefer to donate assets already held, such as retirement savings accounts. If you do not need the income from your IRA or 401(k), you can name a charity as the beneficiary.
The benefit for them is that they do not have to pay income tax or estate taxes on these distributions.
Bequests by Will
If you want to keep all of your funds and assets under your control during your lifetime, it may not make sense to contribute them to a charitable remainder trust or a donor-advised fund. You can instead name a charity in your will, designating a portion of the assets that remain upon your passing to them.
You decide whether to give a flat amount, a percentage of the estate, or another arrangement. A gift made this way also benefits your beneficiaries because it gives a charitable deduction on your estate taxes.
Just remember that a will is just one part of your overall estate plan. For example, a will generally does not override beneficiary designations. It’s important to consider the full picture during the estate planning process.
Gifts
Of course, there is always the opportunity to make a large gift before your passing. If none of the other methods here seem to suit your needs, you can always give cash or assets in the here and now to take a charitable deduction on your taxes this year. Just be warned that this method is generally less effective than other charitable giving strategies.
For instance, if you plan to leave $100,000 to your alma mater at your death, you are leaving valuable tax deductions on the table. Use a trust instead, leave money at your death as intended, but garner some tax savings you otherwise would have missed out on.
Benefits of Planned Giving
Why should you consider planned or legacy giving as part of your overall financial plan? These three benefits will help you decide whether to give and help you narrow down how you want to do it.
Lasting Impact on Your Favorite Charity
This is often the primary motivation for those who wish to give. You want to make one final impact on the charity that is doing valuable work you support in the community. Giving a large gift at the end of your lifetime can significantly increase the amount of work they do. In some smaller local charities, it could even fund their entire operation for a year or more.
Can Provide Income
Some of these vehicles for charitable giving can be especially good in retirement. For example, a charitable remainder trust allots some (minimum 10%) of the funds for charity or charities, while the rest is distributed as a steady stream of income for you or your beneficiaries.
Tax Advantages
Depending on the type of planned gift, you may encounter significant tax advantages. First, a charitable gift often reduces your taxable income. Most of the time, you can take a deduction for your gift in the year that you give it.
If you give assets through a charitable remainder trust or a donor-advised fund, you may also be able to skirt capital gains taxes on the sale of that asset.
Keep in mind that sizable gifts are often excluded from your taxable estate. This means that your loved ones will not have to pay as much in estate taxes if you choose the right vehicle for philanthropic endeavors.
Magellan Helps You Plan Your Giving
Are you ready to start considering the mark you want to make on the world? Magellan can help you weigh all your options to make the most of your money in the here and now, as well as your future philanthropic giving. We specialize in charitable remainder trusts, offering all legal, tax, financial, and estate planning under one roof.
If you want to talk about how to use your funds to impact the local community after your passing, reach out to us today to learn more!
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC.