As April 15th quickly approaches, many people are in the process of reviewing the charitable gifts they made to their favorite charity, religious organization, or alma mater this past year, and considering whether they will continue making these charitable gifts this year. For individuals who are considering charitable giving, they may also be wondering if they should hold off on making charitable donations during their lifetime, and instead just include a bequest to their favorite charity in their Will or Living Trust.
There are a handful of reasons that a person might wish to wait until their death to make a sizeable gift to charity. First and foremost for many (or most!) people is the desire to wait and see if they will ultimately have enough money to support themselves in their old age. Many others also wish to ensure that they are leaving behind “enough” money for their loved ones before they will consider making a gift to charity. And in some cases, individuals may discover that upon their death, Maryland or federal estate taxes will be incurred, and they would prefer to lessen the impact of these taxes by including charitable bequests as part of their estate plan.
In a lot of cases, charitable giving provides the greatest benefit during the donor’s lifetime. While there are certainly a few individuals who have estates large enough to face the prospect of paying estate taxes at their death, many more individuals can realize the benefits of an income tax deduction for their gifts made each year. Gifts made during the donor’s lifetime also provide the intangible yet rewarding experience of allowing the donor to see what types of deserving projects the recipient organization may create with these gifts.
For those who decide that they would like to make charitable gifts during their lifetime, there are numerous options to strategically make these gifts. For example, individuals over age 70 ½ who are forced to take Required Minimum Distributions (RMDs) from their IRAs (and thereby receive income that they may not actually need!) can make gifts of up to $100,000 straight from their IRAs to qualifying charities. This won’t provide the donor with an income tax deduction, but it does prevent the RMD from counting as income to the donor in the first place.
Another option involves transferring highly appreciated assets, such as stock, directly to a charity. For someone who is already planning to make a charitable gift anyway, this provides two benefits. First, the donor gets the income tax deduction that they already would have gotten, and secondly, they also completely avoid the capital gains tax that they would have owed if they had sold the stock, and subsequently donated the proceeds of the stock.
One increasingly popular option for lifetime giving is to create a “Donor-Advised Fund.” When using a Donor-Advised Fund, the donor makes a gift to a sponsoring 501(c)3 organization which retains the donated funds for future distributions, and the donor immediately receives the benefit of an income tax deduction for the gift. As an added benefit, the donor is able to recommend that the sponsoring organization use the retained funds to make distributions to various different organizations for many years into the future – even allowing the donor’s children to become involved in making these recommendations. One important caveat is that the donor can only make recommendations, but cannot force the Donor-Advised Fund to make distributions – so the prospective donor should be very careful to pick an organization with a solid reputation for administering these types of funds.
For the individual who decides that they would prefer to make their charitable gifts as part of their estate plan, it is sometimes as simple as stating in their Will or Living Trust that they wish to leave a certain dollar amount, or a percentage of their estate, to their preferred charity. These types of bequests can be given without any strings, or could require that the money be spent for a specific purpose. For example, it is possible to require that a donation to the University of Maryland be used to support the School of Nursing.
Even for someone who has made the decision to leave assets to a charity upon their death, it is often more beneficial to designate the charity as a beneficiary of their traditional retirement account (such as an IRA, 401(k), or 403(b)) instead of specifically naming the charity in their Will or Living Trust. This is because when an individual is named as the designated beneficiary of a traditional retirement account, that individual will have to pay income tax on any amounts withdrawn from the inherited account. However, if a charity is instead named as the designated beneficiary of these accounts, this ensures that the withdrawal of retirement funds by the charity can be done without income tax consequences to the charity, while reserving the donor’s other assets for their family, which can generally be used without incurring income taxes.
Charitable giving does not have to be complicated and is an important part of “giving back,” but the considerations involved can vary a lot depending on a person’s goals. For anyone hoping to include charitable giving as part of their estate plan to create a lasting legacy, it is worth taking the time to ensure that they’re making an informed decision about how to structure their charitable gifts.
Jordana Guzman is an attorney with the Estate Planning practice group at Davis, Agnor, Rapaport & Skalny, LLC. For questions about this article or other questions about estate planning documents, please do not hesitate to contact Jordana at 410.995.5800 or via email.