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How Does Charitable Giving Work In Estate Planning?
There are several ways one can make a charitable gift as part of their estate plan. First and foremost, you can always give during life. This can be done through a one-time or recurring donation to a charitable organization that qualifies as tax-exempt under 501(c)(3) of the Internal Revenue Code.
Many charitable organizations have campaigns on Giving Tuesday in which a corporate sponsorship allows for any amounts donated on that day to be matched, providing a more substantial impact for your favorite cause while allowing you to receive the allowable deduction on your annual income tax returns.
Gifting during life can also come in the form of a qualified distribution, up to $100,000, from a tax-deferred retirement account. The amount of the disclaimer counts towards the account owner’s annual required minimum distribution, providing you with an income tax benefit.
Estate Gifting After Death
At death, gifting through your estate plan can take many forms. Here we will discuss four common ways to gift through your estate plan: specific bequests, residuary distributions, “Santa Clause,” and beneficiary designations. Beyond the methods discussed here, charitable gift annuities and charitable remainder trusts are two additional methods.
Specific Bequests
A specific bequest is a set dollar amount to be given at the time of your death. This can be done through a living trust or through a last will and testament. These amounts are paid off the top of the estate, ensuring the charity receives the exact gift amount.
Residuary Distributions
Once the specific bequests in a trust or last will and testament have been satisfied, the remaining amount is referred to as the residuary. The residuary can be distributed in shares, fractions, or percentages. For example, you may choose to leave $5,000 to three different charities as specific bequests to be paid first, and then divide whatever is remaining, the residuary, among four individuals or entities in equal or unequal shares.
Santa Clause
The third type of gifting is for individuals who have an estate that is above the estate tax exemption amount, currently $6.94 million in New York for 2024. A “Santa Clause” is another name for a disclaimer to charity in your estate planning documents. This allows your beneficiaries to avoid potential estate tax by choosing a portion of the estate to go to a charity of your choosing. This is specifically useful in states such as New York where there is a “cliff” which serves to eliminate any estate tax exemption once the estate value is more than 105% over the state exemption.
Choosing to distribute to charity and reduce the amount of taxes owed is an attractive tool that requires only that you choose the charity or charities that you would want to benefit; leaving the decision on the amount of the contribution to be made by your heirs at the time of your death.
Beneficiary Designations
Last, completing a designated beneficiary or transfer on death form while you are living can ensure that the charity will be the direct beneficiary of a brokerage or retirement account at your death. Specifically for retirement accounts, gifting tax-deferred assets to a charitable beneficiary can avoid unintended income tax consequences for non-charitable beneficiaries.
How Will You Give?
Giving Tuesday is just around the corner. Use this day as a reminder to review your plan to see where you may be able to benefit your favorite organization or cause.
