How to Include Charitable Giving into Your Estate Planning


Charitable giving is a wonderful way to give back to organizations or individuals who have influenced your life positively, support causes you are passionate about, or perhaps honor the memory of a loved one. Whether actively donating during your lifetime, or planning contributions into your estate plan, the financial ramification should be considered closely to ensure that any applicable tax benefits can be realized.

In late 2017, the Tax Cuts and Jobs Act was passed, and may change previous assumptions and planning efforts in regards to charitable giving and estate planning, so it is important to reassess to see whether changes to your estate plan could be needed.

This tax-reform legislation increased the standard deduction, and limited or eliminated many personal tax deductions—to include charitable giving. The result of these actions is that it is harder for many to itemize their taxes now, and they will be forced to switch to standard deductions. In regards to charitable giving, this legislation reduced the marginal tax benefit by more than 30%, which subsequently raised the after-tax cost of donating by approximately 7%.

Unfortunately, these changes are likely to discourage charitable giving due to less available tax subsidies, with quality organizations and causes expected to shoulder much of this burden. While it is now harder to get tax subsidies from some of your in-life donations, other options still exist to make a charitable impact, to include incorporating charitable giving into your estate plan.

The Tax Cuts and Jobs Act nearly doubled the basic exclusion amount (the exemption amount from estate, gift and generation-skipping) to $11.18 million through December 31, 2025. In 2026, this amount will revert back to $5.6 million. With this in mind, it is important to take advantage of the litany of exclusions and exemptions available currently with the higher exclusion amount.

One of these includes taking advantage of the gift tax annual exclusion wherein up to $15,000 can be gifted away from your estate without counting towards the lifetime limit of $11.18 million. This helps to reduce your estate each year, while still using tax-free gifts. Taking advantage of the increased lifetime exemption allows for the ability to make substantial gifts, and future appreciation on gifted assets while the window is still larger.

Another method is to make unlimited tax-free gifts for medical expenses and/or tuition for friends and family. As long as payments are made directly to the healthcare agency or educational institution, the payments will not count towards the lifetime giving limit or the annual gift tax exclusion.

Trusts are another means for charitable giving in your estate planning. One specific type is a grantor retained annuity trust (GRAT). This trust could be advantageous with the increased exemption, wherein high-income producing assets that are appreciating rapidly can be transferred out of the estate on a discounted basis. While the asset can be transferred to a grantor trust, you still retain the right to receive annual fixed payments from the trust for a number of years if you so desire. This allows for continued benefits from the distribution, yet helps to downsize the overall estate.

Similarly, gift annuities are another option with continued distributions for the donor. With gift annuities, the donor makes a large gift to a charity in order to purchase an annuity. The donor then receives a fixed percentage of the annuity annually, with the charity receiving the rest. Upon death, the charity would be paid the remaining value of the annuity.

Utilizing charitable rollovers is another option for those over 70 ½, who can donate up to $100,000 annually to charities directly from their Individual Retirement Account (IRA) as a Qualified Charitable Distribution (QCD). This QCD also counts towards the minimum required minimum distribution (RMD) for IRAs, and is considered taxable income.

Appreciated stock can also be a way to incorporate donations into your estate plan. If you were to sell the appreciated stock and donate the money directly to an organization, you would still be taxed capital gains on any appreciation. But by gifting the stocks directly to a charity, you instead receive a charitable income tax deduction assessed at the full fair market value and can avoid the capital gains taxes. An added bonus is that the charity can sell the stock and not be subject to capital gains, so it is a win-win for both parties.

It is always important to consult with a professional before making large changes to your charitable giving portfolio. But with recent legislative tax changes, it could be an optimal time to reconsider the available options and look to optimize the tax benefits.

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