Is there one or more charitable organizations you support that you’d like to leave some or all of your estate to after you die? If so, there are several different ways you can accomplish this in a tax-efficient manner.
Here are a few of the most effective strategies for leaving a legacy by passing an estate on to a charitable organization:
1. Make a Charitable Bequest
This is the simplest method — it doesn’t require setting up any kind of special foundation, fund or trust. You will simply state in your last will and testament (or a living trust, if you prefer) that you want certain assets — or your entire estate, if you choose — to be distributed to the charity or charities you designate.
You can bequest assets (including cash, investment securities, jewelry, homes and automobiles) to any person or organization you like, including qualified charitable organizations, also known as 501(c)(3) organizations. If you have significant assets you want to leave to a charity, you may want to work closely with an estate planning attorney to make sure your last will and testament is written in such a way that your charitable wishes are fulfilled.
2. Name a Charity (or Charities) as a Beneficiary
You must name a beneficiary for assets like retirement accounts and life insurance policies who will receive these assets after you die. While you can certainly name your spouse, children or other family members as beneficiaries, you can also name a charity as a beneficiary. Doing so could yield valuable tax benefits.
For example, the charity will receive the full amount of the account or policy because 501(c)(3) organizations don’t pay income tax. Also, this amount will offset any estate taxes that your heirs must pay if your estate exceeds the federal estate tax exemption amount, which is $11.7 million per person in 2021. Note that life insurance proceeds pass to heirs income tax-free so one strategy is to name a charity as the beneficiary of taxable investment accounts and family members as heirs of tax-free life insurance policies.
3. Establish a Charitable Foundation
One of the most common types of charitable foundations is a Donor Advised Fund, or DAF. This is a pool of money managed by a charitable organization on behalf of multiple donors. You will set up a DAF in your family’s name and can specify which charitable organizations will receive your assets and when, as well as how your assets are invested.
A big benefit of a DAF is that you can donate assets to the fund now and receive an immediate tax deduction and then decide later which specific charity or charities will receive the assets. When you die, the assets will be dispersed to the charity or charities you’ve designated. Another benefit is that the charity handles fund setup and other financial and management tasks, which makes DAFs relatively easy and inexpensive to establish and maintain.
You can also establish a family foundation or a community foundation. With a private family foundation, your assets will be distributed to charities that you want to support after you die. With a community foundation, your assets will be distributed to charities by outside professionals who will make decisions based on what they feel are the best interests of your community. Foundations are usually more complex and expensive to set up and maintain than DAFs.
4. Use a Charitable Trust
There are two main types of charitable trusts used for leaving an estate to a charity: Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs). With a CRT, you will transfer assets into the trust while you’re alive and you or your beneficiaries will receive a stream of income for a designated term. Any assets remaining in the trust after the term expires (or after you die) will go to your designated charity tax-free — hence the name, charitable remainder trust.
A CLT is just the opposite: You will transfer assets into the trust while you’re alive and the charity will receive a stream of income for a designated term. Any assets remaining in the trust after the term expires (or after you die) will go to your beneficiaries, usually on a tax-free basis.
Contact us if you have any questions about these and other strategies you can use to leave your estate to charity.