Many people engage in charitable giving throughout their lives and wish to continue that tradition following their deaths. Not only is charitable giving emotionally satisfying, but it also can help save on income and estate taxes. By setting a strong example for your surviving family members, you can help encourage them to carry on your values.
Charitable Remainder Trust
A charitable remainder trust (CRT) is a commonly used estate planning tool for charitable giving following a person’s death. When you create a CRT, you are creating an irrevocable trust that provides you with income for life, but which will pass to certain designated charities after your death, or after a specific term of 20 years or less.
You can use a CRT to give yourself lifetime income in the form of a unitrust, which is annual income based on a percentage of the trust, or in an annuity, which is based on an annual fixed amount. Additionally, you designate yourself as a trustee during your lifetime, which allows you to maintain control over investment decisions.
Most CRTs use highly appreciated assets such as real estate or stocks, which produce little or no income. Not only does a CRT satisfy your desire to engage in charitable giving, but it offers significant tax benefits, including the avoidance of capital gains tax, an annual income tax deduction, and total removal from your taxable estate.
Another increasingly popular method of charitable giving is using a Charitable IRA. Last December, Congress passed the Protecting Americans Against Tax Hikes (PATH) Act of 2015, which renewed the Charitable IRA provisions in the law on a permanent basis. Individuals who are 70 ½ and older can contribute money on a pre-tax basis, just as you would with a regular IRA. You can roll over up to $100,000 on an annual basis without incurring federal taxes. A couple with separate IRAs can roll over up to $100,000 per person. However, that rollover does contribute toward your required minimum distribution for the year in which the gift is made. Ultimately, the retirement savings from the IRA passes directly to the charity, without incurring income taxes.
For people who do not own substantial assets, it may be easier to simply designate the charity of your choice as the beneficiary of your IRA. You would simply name the chosen charity or charities by filling out a beneficiary designation form, which is available from the plan administrator of your IRA.