Leaving a Legacy: Incorporating Charitable Giving in Your Estate Plan

Oct 10, 2019

By Saul S. Tilden | Related Practice: Estate Planning & Administration

The end of the year is a time when many people think about charitable giving. Maybe it’s the holiday spirit, wanting to gain a better understanding of year-end finances, or simply that there’s no bad time to think about charity. Whatever the case may be, there are a variety of ways to create a charitable legacy in your estate plan. This article discusses a few of the most effective approaches.

Hands holding heart

Contribute to a Donor Advised Fund

A donor advised fund (“DAF”) is a charitable investment vehicle to which a donor can contribute cash, real estate or other assets during life or at death. Gifts to a DAF are immediately tax deductible for the donor, incur no capital gains upon sale, and grow tax-free. Meanwhile, the donor and the donor’s chosen advisors (often the donor’s children) retain the authority to recommend grants to charities at their own pace, over the course of the fund’s life. The burden of administering the fund and ensuring it complies with federal regulations is carried by the DAF’s sponsoring charity, often a community foundation. Although the sponsoring charity technically has the final authority to direct the grants, most sponsors act in line with the recommendations of the donor and the donor’s chosen advisors. The benefit to a DAF is a lasting legacy that extends beyond death, without the administrative hassle or higher costs of a private foundation or trust arrangement.

Create a Charitable Gift Annuity

A charitable gift annuity is created by agreement between a donor and a single charity. The donor makes a lifetime gift to the charity, which amount is then set aside in an investment account. The charity pays the donor a guaranteed, fixed monthly or quarterly payout for the rest of the donor’s life. The payment amount is calculated based on the donor’s life expectancy and the annuity rates applied by the charity at the time of the gift. Upon the donor’s death, the charity receives the remaining funds in the investment account. The charitable gift annuity provides an income tax deduction during life with the ability to receive an income stream from the amounts gifted.

Create a Charitable Remainder Trust

A charitable remainder trust can be set up during life or upon death. The gift to the trust is irrevocable and is tax deductible in part. Similar to a charitable gift annuity, these trusts are created to pay an income stream to the donor (or if the gift is made upon death, then to the donor’s descendants) for their lifetime or other set term; then, when the income term ends, the remaining assets pass to one or more charities designated in the trust instrument. A charitable remainder trust is highly customizable (within certain parameters) and is a tax-efficient way to provide for family and charity.

Create a Charitable Lead Trust

A charitable lead trust is the reverse of the charitable remainder trust. The trust supports one or more charities with payments made from the trust assets during the donor’s lifetime. Upon the donor’s death, the remaining trust funds pass to the donor’s designated beneficiaries. A charitable lead trust allows the donor to enjoy the satisfaction of charitable giving during life while still providing for loved ones at death. In addition to the income tax deduction when the gift is made, the remainder portion of the gift will pass to beneficiaries at a discounted value for estate tax purposes, making this option especially attractive for those with taxable estates.

Start a Private Foundation

A private foundation is a private charitable organization set up by one or more donors. As with donor advised funds, the donor may contribute cash, real estate or other assets to a foundation. The
difference with a foundation is that it is administered by a board of trustees chosen by the donor to carry out a stated charitable mission. To be considered a charity for federal tax purposes, a foundation must obtain federal charitable status (“501(c)(3) status”) and comply with a slew of federal regulations. While private foundations typically require a significant amount of work and expense to maintain, they can provide their founders with flexibility to direct their charitable intent exactly as they see fit and the ability to leave a legacy that will last well beyond their lifetime.

If you are interested in incorporating charitable giving into your estate plan, we at Stokes Lawrence would be happy to assist. Please contact a member of the Stokes Lawrence Estate Planning Group.