How to Make Charitable Giving Part of Your Estate Plan

If you are charitably-inclined or if you are looking for ways to minimize income or estate taxes, charitable giving is an important financial and estate planning tool.

How to maximize the value of giving will depend on your estate size, the amount and type of assets you want to give, and how to give them. There are a variety of options, which can range from naming various charities on retirement and life insurance accounts, to providing specific or general bequests in a will or trust, to establishing a separate charitable vehicle all together.

Gifts of Cash

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was signed into law in March 2020, included expanded provisions for charitable donations. Specifically, the CARES Act raised the limit for deductibility of cash gifts to qualifying charitable organizations from 60% of adjusted gross income (AGI) to 100% of AGI for those individuals who itemize their deductions.

In addition to this increase, the CARES Act also provided that cash donations in excess of 100% of AGI could be carried over into future tax years, but no longer than five (5) years. The increase to 100% of AGI, however, is set to expire at the end of 2021 meaning that there has not been a better time in many years to maximize cash charitable donations. For individuals who do not itemize, the CARES Act increases above-the-line deductions to $300 for individuals and $600 for married couples. Less scrupulous donors who overvalue contributions must be careful because they can be punished by a fine of 50% of their charitable donation, up from 20%.

At the corporate level, the CARES Act also increased the deductibility of cash gifts to charities to 25% of the corporation’s taxable income, up from 10%.

Gifts of Specific Assets

If you’ve had the good fortune of investing in a stock that has risen substantially, gifting it to charity may provide significant tax savings. Rather than paying short-term gains at ordinary income rates or long-term capital gains at 15% or 20%, an individual can gift asset to charity. The cost basis will be disregarded from the taxpayer’s perspective, and the taxpayer can deduct the full step up in basis.

Gifting assets can be done individually or through a will or trust. Both are valuable estate planning tools. It is important to keep in mind, however, that charities often have similar names and must be differentiated accordingly. If you intend to give to a specific charity and wish that language be included in a will or trust, the charity’s specific bequest language must be embedded in the document. Quite often, it will include the charity’s name, its federal tax identification number, and precise wording as it relates to the donor’s desired use by the charity of the asset. Sample language from the Salvation Army is below:

“I hereby give, devise and bequeath _______________ and No/100 dollars ($DOLLARS) to The Salvation Army, a nonprofit organization located at 440 West Nyack Road, West Nyack, NY, 10994-1739, Federal Tax ID #____________, for The Salvation Army’s general use and purpose.¹“

The sample provides that the gift is for the organization’s general use and purpose, but, to a reasonable degree, you can specify a particular purpose for which it may be used.  An important caveat for a specific use gift is that the desired use be within the charity’s organizational powers. If not, the charity may be forced to refuse the gift, in which case it could pass to the residue of the estate and become a potential probate asset.

You will nevertheless need to locate the exact language because it will vary depending on whether the gift is a specific amount, whether it is specific property or real estate, and whether it is a percentage bequest, residual bequest, or contingent request.

An added benefit is that the charity can sell the asset without paying capital gains taxes as a result of its tax exempt status. For the individual, charitable bequests are also eligible for the estate tax deduction and will reduce estate taxes. The federal estate exemption amount is $11.7 million for unmarried individuals and $23.4 million for married couples, which means it is not an issue for the overwhelming majority of decedents. For Illinois residents, however, the state estate exemption amount is $4 million, which means more Illinoisans are subject to state estate tax liability. Illinois is also unique insofar as the federal estate tax applies only to amounts over the exemption amount, the Illinois estate tax applies to the entire estate. This means that if you die with an estate valued at $4,000,000.01, you are taxed on the full amount. At the federal level, if you’re an unmarried individual and you die with an estate valued at $11,700,000.01, you would, in theory, only be taxed on the penny.

Donation of Retirement Accounts

The sample rules for naming charities by will or trust apply to retirement accounts. Using the same language, an individual can name a charity as a beneficiary of all or a percentage of your non-Roth retirement accounts. Thus, the beneficiary designation form must be prepared using the precise language otherwise the charity may not be able to accept the gift.

Just as the charity can sell appreciated assets with stepped up basis with no tax liability because of the charity’s tax exempt status, the charity can similarly do the same from the non-Roth account without having to pay income taxes.

This is particularly important in light of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Prior to the SECURE Act, beneficiaries of a retirement account could stretch the distributions out over their life expectancy. Now, only eligible designated beneficiaries (EDBs) can stretch the distributions over their life expectancies. EBDs include surviving spouses, disabled or chronically ill individuals, individuals who are not more than 10 years younger than the retirement account owner, or a child of the retirement account owner who has not reached the age of majority. By contrast, designated beneficiaries (DBs) must receive the full value of the retirement account within 10 years. Congress estimated that this would generate $15.7 billion dollars of additional tax revenue by condensing the timeframe in which all distributions must be forced out of the retirement account.  Thus, in light of the SECURE Act, it is even more critical to consider naming a charity as a retirement account beneficiary if your estate is likely to be over the federal or state estate exemption amount in order to receive an estate tax charitable deduction and lower any applicable federal or state estate taxes.

Gifts of Life Insurance

Contributions of life insurance policies or proceeds are similar to designating a charity as a beneficiary of a retirement account.  The charity can receive the funds and use it for its general purposes. If you gift the value of an ordinary policy, the gift is tax-deductible when made. Payment of annual premium is deductible as a charitable contribution. If the policy is paid in full and given to charity, the cost of purchasing a new paid-up policy at your current age is the value of the charitable deduction.²

Other Gifting Vehicles

Donor-Advised Fund

For those who do not know, a donor-advised fund (DAF) is an irrevocable gift of an asset to a qualifying charitable organization. The gift is complete and immediately qualifies for an itemized federal and state income tax deduction. The funds go into an account at the charity, which the donor can manage, invest and grow. The donor can establish a unique name for the fund and direct where and when the fund may ultimately go, enabling the donor to establish a legacy, develop a giving philosophy and implement the donor’s philanthropic vision.

Charitable Lead Trust

A Charitable Lead Trust (CLT) is established by a transfer of assets to a qualifying CLT. The CLT assets remain property of the grantor, but the income generated by the assets in the CLT are distributed to charities. Upon the death of the grantor, the assets in the CLT can be passed onto beneficiaries, including the grantor’s heirs, relatives or friends.  The income that is distributed to charity qualifies for an income tax deduction. A testamentary CLT, by contrast, will distribute the principal at the individual’s death. It will not qualify for an income tax deduction, but it will qualify for an estate tax deduction.

Charitable Remainder Trust

A Charitable Remainder Trust (CRT) is like a CLT, except the order of payees is inverted. While a CLT may give a stream of income to charity with the principal distributed to a beneficiary, a CRT first pays a separate beneficiary with the remaining trust assets distributed to a charity. The grantor can set up a trust for the beneficiary’s life and whatever remains at the beneficiary’s death will be distributed to charity.

*** This is not an exhaustive list of charitable trusts or full summary of gifting types. This article attempts to explain the most common avenues that individuals use to give back and limit federal and state income and estate tax liability.

¹The Salvation Army’s Bequest Language, The Salvation Army, https://tsalegacy.org/?pageID=127 (last visited Aug. 1, 2021).

²Planned Giving, Wills, Gift Annuity, Trusts, The Salvation Army, https://www.salvationarmyusa.org/usn/planned-giving-wills-gift-annuities/ (last visited Aug. 1, 2021).