How to Incorporate Charitable Giving into Your Estate Plan

For many people, setting up a strategy for charitable giving is an essential part of planning their estates. Giving to a charitable cause you believe in can allow you to leave a legacy behind that goes beyond providing for your family when you pass away. You may also choose to make donations to a charity during your lifetime to minimize your tax burden while supporting a cause you care about. There are no limits to the amount you can give to charity, and no estate tax is paid on donations to a 501(c)3 organization.   

Importantly, a number of vehicles can be used to incorporate charitable giving into your estate plan. 

Leave Money to a Charitable Foundation in Your Will

One of the easiest ways to incorporate charitable giving into your estate plan is by leaving instructions in your last will and testament. You would simply specify the lump sum amount you wish to leave in a charitable bequest clause, or you can allocate a percentage of your remaining assets to a charity once your debts have been paid and your assets can be distributed. Alternatively, you could designate certain assets to the charity, such as stocks, bonds, or real estate. 

Set Up a Charitable Trust

There are different types of trusts that can be used for charitable giving, based on your objectives. The trust you choose can depend upon your need for income, the tax benefits, and your philanthropic wishes. The charitable trusts you may consider can include: 

• Charitable lead annuity trusts (CLATs) — With a CRAT, a fixed dollar amount would be paid to the charity for a specified time period, or the lifetime of the grantor. The remaining assets in the trust are distributed to non-charitable beneficiaries, such as the grantor’s family.
• Charitable lead unitrusts (CLUTs) — A CLUT allows the grantor to provide to a charity for a set period of time, based on a fixed percentage each year. The remaining assets are distributed to non-charitable beneficiaries.
• Charitable remainder annuity trusts (CRATs) — A CRAT is a type of irrevocable trust where the grantor donates to a charity while paying a fixed income in the form of an annuity to non-charitable beneficiaries.
• Charitable remainder unitrusts (CRUTs) — A CRUT pays income to the grantor and other beneficiaries for a specified amount of time. The remaining balance of the trust is distributed to a charity of your choice. 

An estate planning attorney can help you choose a trust structure that will align with your specific financial goals. 

Establish a Legacy with a Community Foundation

A community foundation allows you to pool your donation with those of other donors to support a local or regional charity. Rather than incur the costs and bear the administrative burden of starting your own independent charity, the foundation oversees the investment and administration of funds. 

Make Charitable Bequests with Your Retirement Account

To make a charitable bequest with your retirement account, you must designate the charity of your choice as the beneficiary of the IRA or other retirement assets. While it is possible to donate your retirement funds by cashing out the assets in the account, you would be paying income tax on the distribution before the funds are donated to charity. Instead, a direct contribution to a charitable organization can be a tax-efficient strategy. This ultimately means more funds can go to the charity or your other beneficiaries.   

To donate your retirement assets during your lifetime, you would need to take a distribution from the account and include it in your income for that year. In addition, you would need to pay taxes on the distribution. The funds could then be contributed to the charitable organization of your choice. However, those who are 70 ½ and older can use a qualified charitable distribution — this allows them to contribute up to $108,000 from their IRA each year directly to a charity without paying income tax on the distribution. 

Use Beneficiary Designations

A beneficiary designation is another tool that can be used for charitable giving after your death. To make a donation with a beneficiary designation, you would simply identify the assets you’d like to leave to a charity — whether it’s life insurance, a bank account, an investment account, or another type of account — and fill out the applicable form. Specifically, beneficiary designations allow you to instruct the institution to pay all or part of the assets to the charity of your choice when you pass away. Unlike using a will to outline your wishes, this tool avoids the probate process. 

Be Mindful of the Impact Charitable Giving Can Have on Medicaid Planning

Charitable giving can be beneficial to meet your philanthropic objectives and for tax planning purposes. However, it’s important to be mindful of the impact it may have on Medicaid planning and VA benefits. If you will potentially be seeking government benefits such as Medicaid, the five-year look-back period must be taken into consideration when making charitable gifts. Whereas, VA planning has a VA has a three-year look-back period. Failure to make a transfer prior to five years before applying for benefits can result in a penalty period of ineligibility.   

Contact an Experienced Michigan Estate Planning Attorney

If you would like to make a charity a beneficiary of your estate plan, it’s essential to consult with a knowledgeable estate planning attorney who can best advise you regarding the strategies you should implement. To learn more about how to incorporate charitable giving into your estate plan, contact us today. Our attorneys provide skillful counsel to individuals and families throughout the estate planning process and offer the legal assistance they need.