Should I include charities in my estate plan?

Everyone knows that charities are good things. The very word “charity” conjures up warm thoughts of kindly and beneficial acts by individuals or groups to help those in need. Charity is such a good thing that virtually ever since there was a tax code, charitable organizations have been given special tax allowances. In general, true charitable organizations do not pay income taxes, and those making contributions to charities are entitled to income tax deductions for their charitable gifts.

Should we consider charities when we plan our estates? Yes, absolutely! And not necessarily just because of the tax benefits. This is only my personal view, and not a legal opinion or technical explanation. While we generally think that estate planning involves arranging to transfer our property to selected close family members and friends, the transfer of an estate at death is such an unusual event in our lives, a once-in-a-lifetime occurrence, so to speak, that perhaps our thoughts should go a little deeper. Who could actually benefit from your estate? Do your children really need everything that is left over when you die? Would they suffer a hardship if you included a small bequest to your church, a university or a local charitable organization? I have seen too many clients whose hard work resulted in a decent-sized estate, more than sufficient to take care of them throughout their lives, who ended up leaving hundreds of thousands of dollars and more, to someone who had not been in contact them for years, simply because they thought there was some moral obligation to leave their entire estate to someone related to them.

While families are extremely important, how would the lives of your children be different after your death if you left 10%, 5% or even 1% of your estate to a charitable organization? Churches, schools, national research organizations and many others depend on contributions to continue operating. This duty should not be left just to the extremely wealthy. Your assistance could have an even greater impact on local charitable organizations, where tight budgets and ever-expanding responsibilities make funding a critical and ongoing need. A bequest of a few thousand dollars could make the difference between success or failure of many of these organizations.

An advantage of charitable giving as a part of your will or trust is that the gift will have absolutely no impact on your ability to support yourself or provide for that proverbial “rainy day.” You can have full use of your savings and investments right up until the time when you no longer need them.

If your estate is not large enough for you to worry about federal estate taxes (currently $3,500,000), a charitable bequest in your estate plan will have to be made out of the goodness of your heart, since you would not have any estate tax liability anyway. If, however, your estate is large enough to trigger an estate tax, charitable bequests can have some significant estate planning benefits.

First, under federal estate tax laws, a deduction is allowed to your taxable estate for charitable bequests, just as under the income tax laws. In appropriate circumstances, a modest charitable bequest can make the difference between your family paying or not paying federal estate taxes.

Beyond outright bequests, there are a number of interesting estate planning techniques involving charities that can have a greater impact on estate taxes and even, in some cases, on income taxes during your lifetime. While an explanation of the complete range of possible techniques is beyond the scope of this article, here is one oversimplified example: Suppose you had a piece of real property worth $1,000,000 that you had purchased many years ago for $50,000. If you sell it now, you will have a capital gains tax based on a $950,000 gain. While capital gains tax rates are slowly coming down, there will still be a substantial tax to pay.

A useful technique in this situation involves a “charitable remainder trust,” in which you retain the right to a certain amount of income from the trust assets during your lifetime and, upon your death, whatever is left, or the “remainder” then passes to the charity you have designated. Thus, if, instead of selling your property outright, you transferred the property to a charitable remainder trust before it is sold, you would pay no capital gains tax on the sale and would have (subject to a few conditions) the lifetime benefit of the income from the entire proceeds of the sale, including the amount that otherwise would have gone to pay the capital gains tax. The value of the asset would be removed from your estate for federal estate tax purposes and you would probably even be entitled to a current income tax deduction based on the present value of the charity’s right to receive the remainder at your death.

The concepts involved in the discussion above may be new and, if you are interested, probably merit additional study before you take action. Whatever your situation, however, please consider including charities as a part of your estate plan.