If you live in Texas or Arkansas, you have a right to set the terms of your own legacy.
For many families, legacy is simple and straightforward, with assets moved between family members and inheritances to left to surviving children and spouses and siblings. However, your estate plan doesn’t have to stop with immediate relatives. In some cases, setting aside money for charity could be an incredibly practical decision. Not only will you have the chance to contribute to a cause you care deeply about, but you may be able to minimize your estate’s tax burden, too.
Read more to learn about charitable trusts and charitable giving, or contact Ross & Shoalmire today to speak to an Estate Planning Lawyer and schedule your initial consultation.
The 3 Big Advantages of Charitable Giving
Your estate plan is your vision for how you’d like the assets you owned in life to used, redistributed, or sold after your death. If you have an eye for philanthropy, you may have already considered setting aside funds for your church or a scholarship fund. No matter your motivation, your desire to make the world a better place isn’t just admirable—it could work to the advantage of your other heirs, too.
The three biggest advantages of making charitable giving part of your estate plan include:
- Legacy. You don’t have to be extravagantly wealthy to make a difference through charitable giving. Setting aside any amount of money and assets aside for charity lets you put your name on a good cause and rest assured knowing that some of your success will go toward a cause you care about.
- Personal taxes. Depending on how you structure your estate plan, you may be able to leverage charitable donations in many ways. Often, donors concerned about their estate tax liability will make significant lifetime charitable contributions, which can be written off on state and federal taxes and used to reduce anticipated estate taxes long-term.
- Estate taxes. The federal estate tax is only levied on multimillion-dollar estates. Most people don’t have to worry about it, but the estate tax is high enough that it could present a potent threat to higher-income families. The federal estate tax is also indexed for inflation, but unexpected changes to tax law could lower or eliminate exemptions in their entirety.
You don’t typically have to make any major sacrifices to integrate charitable giving into your estate plan, but this doesn’t mean that simply naming an NGO as an heir is the best way to make your mark.
Your Options for Establishing a Charitable Legacy
Texas and Arkansas each have their own legal codes, but both states have flexible statutes that let residents make the most of estate planning. Although you have many different ways to establish a charitable legacy, most options will fall into either of the following categories:
Lifetime Gifts
Any gift you give to charity while still alive could be considered a lifetime gift.
Lifetime gifts typically let you claim income tax deductions at the state and federal levels. If you’re close to the Internal Revenue Service’s current estate tax threshold, setting aside money or high-yield, appreciating assets could be a way to reduce the value of your taxable estate without sacrificing your other heirs’ inheritances.
Lifetime giving has another advantage: short of establishing a charitable trust, it is the only way to see how your money is used while you’re still alive.
Testamentary Transfers
A testamentary transfer is any gift or asset subject to probate and beholden to the terms of your last will and testament. Your will lets you do many things, including:
- Nominating an executor
- Naming heirs and estate beneficiaries
- Selecting a guardian for your minor child
- Inventorying assets
- Explaining your inheritance decisions
- Setting aside money for charity
Testamentary transfers almost always go through probate, the formal and court-administered process of dissolving a deceased person’s estate. Probate can be expensive and time-consuming, offering many opportunities for disgruntled heirs and predatory creditors to initiate litigation.
As such, using a last will and testament is only recommended for charitable giving when your only motivation is leaving a small amount of money for an individual organization.
Charitable Rollovers
If you have an individual retirement account, or IRA, you can use a charitable rollover to make tax-free donations shortly after your 70th birthday. Aside from being tax-free, your contributions can be counted toward your required minimum distribution (RMD).
Trusts
A trust is a very distinct type of legal arrangement between several parties. These parties almost always include the following:
- The trustor. The trustor is the person who establishes a trust and provides its funding. In most cases, the trustor will also set conditions on the use of trust assets.
- The trustee. The trustee is the person who administers the trust after it has been established or after the trustor has passed away. Trustees have legal authority over the trust’s assets but are also bound by a fiduciary duty to manage the trust in the best interests of its named beneficiaries.
- The beneficiary. The beneficiary of a trust is any person or party receiving distributions or other benefits from a trust.
In most states, a trust must have a trustor, a trustee, and a beneficiary to be considered valid, but different types of trusts are subject to different requirements. For example, a revocable trust lets you retain access to your trust assets for the remainder of your life. Irrevocable trusts, in contrast, necessitate a greater separation between you and your trust assets—but they can also be used to shift various risks and liabilities away from your estate.
Protecting Your Choice to be Charitable with a Charitable Trust
You have your own reasons for being charitable.
Whether you are motivated by the thought of helping others or looking for an opportunity to minimize taxes while contributing to the greater good, your estate plan should reflect your priorities. Consequently, general estate planning solutions, like writing a will or establishing a revocable living trust, work for many families—but they don’t always offer enough protection and peace of mind for everyone.
If you plan to make charity a significant part of your legacy, you should talk to your Estate Planning Lawyer about charitable trusts. These trusts, which are designed specifically for charitable donations, typically fall into either of two categories:
- Charitable remainder trusts. A charitable remainder trust, or CRT, provides distributions to a lifetime beneficiary and a named charity or charities. You can be your own lifetime beneficiary or name a family member for the role. So long as you are alive, any interest or profits generated by the trust will be directed to the lifetime beneficiary, with the remaining principal going to the charity after your death.
- Charitable lead trusts. A charitable lead trust, or CLT, also makes distributions to different beneficiaries. In the case of a CLT, your trust will make periodic, recurring payments to a charity of your choice. After your death, the remaining principal will go to your other trust beneficiaries.
Charitable trusts differ from more general-purpose trusts in several key ways.
Unlike a revocable living trust, a charitable one is usually irrevocable, which means it cannot be easily changed or terminated after it is established. Once you transfer your assets to a charitable trust, they typically become the trust’s property—you may still have certain rights of access, but you won’t be able to reclaim trust assets as you see fit.
Although this might sound disadvantageous, it can actually be quite beneficial. Since you won’t be able to exert any meaningful control over most charitable trusts, the government won’t levy capital gains or estate taxes on interest generated by the charitable trust.
Furthermore, if you’re making regular payments to your trust, you may be able to claim income or other tax deductions.
