By Brady Marlow, CFP®, AEP®, CAP, CPWA®, CExP™, Director, Carson Private Client Wealth Strategy
Although most people focus first on loved ones in developing their estate plan, you may also want your legacy to include continuing support of issues and organizations you’re passionate about. You can do this by integrating philanthropic giving into your estate planning process.
Understanding Wealth Transfer
Wealth transfer refers to the process of conveying wealth from one generation to the next. We’re currently in the midst of the Great Wealth Transfer, the greatest generational wealth transfer in history, with more than $84 trillion expected to be passed along through 2045 from the Oldest Generation and Baby Boomers to younger generations.
The Role of Philanthropy in Wealth Transfer
It’s predicted that about $72 trillion of the wealth transferred during the Great Wealth Transfer will go to heirs, with about $12 trillion — or one-sixth of the total amount — going to charities. Clearly, charitable giving is important to many donors.
If you have causes you value and want to support, there are multiple options for effectively distributing wealth to them during your lifetime as well as through your estate. Structuring your giving carefully can help lower your tax bill and maximize the impact of your gifts.
Identifying Causes that Matter to You
The first step in developing a philanthropy plan is to choose a special cause or causes you want to support. You may already have a cause that is important in your life, or you may want to give some thought to your strongest passions and concerns about the world.
Causes can be humanitarian, scientific, medical, literary, artistic, historical, environmental, educational, tech-oriented, etc. When you find the right cause, you should feel excitement or passion about supporting it. But you should also do your due diligence, just as you would for any major investment. Make sure the organization you choose is reputable and uses its funding appropriately. Check out the charity’s website for information and transparency. Find out if it’s properly registered with the state or if it’s registered with the IRS as a tax-exempt organization. You can also use these organizations to help research charities: Give.org, Charity Navigator, or Charity Watch.
You can choose to support an organization that is not IRS tax-exempt, but if you do, be aware of the tax consequences and do a deep dive into its activities and finances before donating.
Setting Philanthropic Goals
Once you’ve chosen an organization or organizations, what impact do you want to be able to have? Think about both what you can give and what they need.
Philanthropic goals can range from sponsoring part of a special event to funding multi-year research projects. You could help them increase headcount, purchase supplies, provide scholarships, keep the lights on, buy an expensive piece of equipment or more. If your gift is substantial, consider discussing its best use with the organization. Most organizations will also accept general donations, but having a specific goal may help you make better decisions about how, when, and how much to donate.
Integrating Philanthropy into Your Estate Plan
When you know your recipients and goals, you’re ready to talk to your financial advisor or estate planner about the best way to structure your donations.
Charitable Bequests in Wills
Leaving a charitable bequest in a will is a simple giving strategy. If you already have a will, you can just update it with your bequest. In the will, specify who you want to gift and what type of bequest you want to make. You can choose to leave a specific dollar amount, a percentage of the estate at the time of your passing, or a “residual bequest,” which is made from the balance of your estate after other debts, expenses, and bequests are fulfilled.
The Internal Revenue Service (IRS) has an estate and gift tax exemption of $13.61 million per individual for 2024. This essentially means that in 2024, you can leave up to that amount of money among all your heirs without triggering estate or gift taxes.
Once you update your will, make sure to have the newest version signed and notarized.
Establishing Trusts for Charitable Giving
Like any type of trust, a charitable trust is a legal entity created for the purpose of holding and managing assets. A charitable trust holds and manages cash, securities, real property, etc. for the purpose of distributing it to charity based on your instructions. It can make distributions both during your lifetime and after your death, so charitable trusts are often used to set up a long-term program of ongoing giving.
The trust is a wholly separate entity from you. It owns the assets it holds, pays separate taxes, and requires management.
The two most common types of charitable trusts are charitable remainder trusts and charitable lead trusts. A charitable remainder trust pays out income to you or your beneficiaries for life or a specified time period and then donates the remainder to your chosen charity or charities. A charitable lead trust does the opposite. It pays out donations to the charity for your lifetime or a specified period of time and then distributes the remainder to your heirs.
The tax implications of these trusts vary depending on how they are set up and managed. For example, you may want to create a charitable remainder trust if you have substantially appreciated assets that you’d like to sell without triggering capital gains taxes. This type of trust is tax-exempt, so capital gains, dividends, and interest generated by the trust accumulate tax-free. However, distributions to income beneficiaries may be taxable and subject to special tax rules.
Donor Advised Funds (DAFs)
A donor-advised fund is a type of relatively simple charitable account that allows you to invest contributions into the fund for immediate tax benefits and direct payments from it to a charitable organization any time now or later. You can take your time deciding how to distribute the funds, and you have the flexibility to change payment amounts and even charitable recipients as you choose.
Because donor-advised funds can accept contributions from multiple donors and have an unlimited lifespan, you can use one to support a long-term program of family giving.
Develop a Family Philanthropic Vision
If you’re passionate about giving back, you may want to leave a legacy of philanthropic giving behind, even after you pass. To do so, it’s important to share your vision and values. As your children become adults, you can sit down with them and other family members to create a shared mission statement outlining charitable goals for the family as a whole. Pooling your resources through a trust or donor advised fund can help your individual contributions achieve greater impact, as well as optimize the use of tax strategies to benefit you and your heirs now and later.
Work with Your Financial Advisor
One of the most significant benefits of charitable giving is its potential tax advantages. But IRS rules for deducting charitable donations are both specific and complex. And they vary considerably, based on the type of assets to be donated, the amount, timing, and structure you set up.
That’s why it’s important to work closely on your estate plan with your financial advisor, who can help you navigate the tax code, ensure your wishes are clear and carried out, recommend an optimal structure for funding, and keep your plan current with tax changes and market conditions.
To be custom-matched with a fiduciary you can trust to support your goals with customized planning and put your interests above theirs, take advantage of our advisor matching program today.
Brady Harlow is not affiliated with Cetera Advisor Networks, LLC.
This article not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor.
