One of the key aspects of estate planning is figuring out how to make the biggest charitable contribution you can, given the resources available to you. Unfortunately, many people make the mistake of not exploring all the avenues available for charitable giving after death and thus miss out on some opportunities to make an even bigger impact. While cash gifts remain the standard among estate plans, it is important to consider the other options available.
Sometimes these other options may have greater tax benefits or simply make the giving process much simpler for you. Additional forms that charitable giving can take include:
1. Property
While people tend to think of charitable gifts in terms of cash, there is no rule about giving non-cash property, such as real estate. Many people end up gifting a piece of real estate to a specific charity upon death since it affords them use of the property during their lifetime and ensures that it goes on to make a real difference for an organization. Property gifts can also include things like art and other collectibles.
Realistically, anything with value can be given to charitable organizations, so feel free to get creative with your decisions. However, it is important to keep in mind what the organization might do with the property. With real estate, the property could be used for a specific purpose. Organizations usually end up selling collectible items for cash.
2. Appreciated Stock
Much of your money is likely invested to help it grow over time. No real reason exists to liquidate these investments upon your death for the cash. In fact, you can simply give a specific investment to a charitable organization. Then, the charitable organization can choose to sell the investment to use the cash or hold it to sell down the road.
This approach can prove especially beneficial if the organization already has its own investment portfolio, as the new stock can simply be added to the account. However, this is not always the case given the strict rules for nonprofits regarding how money is handled. Giving appreciated stock also has some tax benefits. A charity can sell appreciated stock and pay no capital gains taxes.
3. Charitable Rollover
You actually do not need to wait until your death to enact charitable giving as part of your estate plan. Provided you are retired, you can name a specific charity as a beneficiary of your IRA. You are allowed to give up to $100,000 per year to charity directly from your IRA. This counts toward any required minimum distributions (RMDs) you have.
If you choose this option, these gifts from your IRA count as a qualified charitable distribution. This means that you can exclude the amount from your income. In other words, you do not need to pay taxes on the money that you contribute. This option is a great way to lower your tax bill while still meeting your required distributions and contributing to a worthy cause. Definitely consider this approach as part of your retirement tax strategy if you have an IRA and worry about the tax impact of your RMDs.
4. Life Insurance
Never play down the importance of life insurance in the estate planning process. Your loved ones will often count on this insurance to cover certain costs. However, you can also name charities as the beneficiary of your plan, especially if you take out more coverage than you think you will end up needing. The same substantial tax free leverage that life insurance provides for your loved ones can benefit the charity as well.
Another option is to take out a charitable giving rider, which will pay a percentage of the face value of a policy to a particular charity. Importantly, you need to read the fine print of the rider to ensure it does not reduce the cash value of the policy or the death benefits bestowed. While this is not usually the case, you will also face limits in how much can be gifted with this strategy. Always balance the cost of the rider with the benefit; it may make more sense to use another option on this list if the expense is significant.
5. Create a Trust or Foundation
When it comes to incorporating charitable giving into your estate plan, you may also choose to create a trust or a foundation. A charitable remainder trust will allow you to make tax-free donations to charitable organizations while reducing your taxable income. Of course, this all happens prior to your death. To create this type of trust, you simply need to enlist the help of a financial planner or accountant who can help use funds from other accounts to create it.
A foundation provides even more flexibility as you can give as much as you want to whomever you want for as long as there is still money in it. People often think of foundations as something for the wealthy, but this is not the case. Even modest donors can benefit from making a foundation in terms of maximizing impact and minimizing taxes.