Preserving Your Legacy: Charitable Considerations When Establishing Your Estate
Leveraging Charitable Trusts and Tax Strategies for Lasting Impact
Estate planning is not merely about allocating assets—it’s about crafting a legacy that reflects your values while strategically managing tax implications. Thoughtful integration of charitable considerations can preserve wealth for future generations, optimize tax outcomes, and support causes close to your heart. This whitepaper explores key strategies, practical scenarios, and essential takeaways to guide you through the process.
1. Reviewing Beneficiaries and Tax Implications
Regularly reviewing your beneficiary designations is a cornerstone of effective estate planning. It’s essential to consider the taxation aspects associated with each type of account. Discussing these items with your estate team of your advisor, accountant, and attorney will help you preserve your legacy over future generations.
Key Points:
- Beneficiary Reviews: Conduct periodic reviews of your beneficiary designations to ensure alignment with your evolving goals.
- Tax Benefits: Adding a charitable organization as a beneficiary can lead to significant tax savings over the long run.
Sample Scenario: Imagine a client who initially named family members as sole beneficiaries. Upon reviewing their estate plan, they opted to designate a trusted charity as an additional beneficiary on certain investment accounts, like an IRA or a non-qualified annuity. This adjustment not only supported their philanthropic objectives but also reduced the taxable portion of their estate, resulting in possible lower taxes for their heirs.
Key Takeaways:
- Regular updates to beneficiary designations can maximize tax efficiency.
- Including charitable organizations as beneficiaries offers a dual benefit—supporting causes you care about while optimizing your estate’s tax position.
2. Navigating Complex Taxation Issues
Understanding the tax treatment of various accounts is crucial when incorporating charitable elements into your estate plan. Here are some important considerations to discuss with your estate team:
- Step-Up in Basis:
- What It Means: Certain assets (e.g., Brokerage accounts and non-qualified investment accounts,) benefit from a “step up” in basis at the time of inheritance, potentially reducing capital gains taxes. There are two ways this can happen depending on ownership. If you have a single ownership account, your beneficiaries would get a full step up in basis, including a spouse. If you have a joint account with someone, they would only receive a partial step up in basis.
- Strategic Use: Deciding whether to give during your lifetime or posthumously can affect the tax outcome.
- Deferred Income Accounts:
- Characteristics: Some assets, such as non-qualified annuities, defer all income until withdrawn and do not receive a stepped-up basis.
- Planning Tip: Consider adding a charitable beneficiary to these accounts to help alleviate the tax impact on your heirs.
- Retirement Accounts:
- Traditional IRAs: These accounts allow income deferral until retirement, at which point distributions are taxed.
- Qualified Charitable Distributions (QCDs): You can use your annual QCD limit to support charitable causes now, which benefits you by being able to take pre-taxed dollars out of the account with no tax impact on you.
- Planning Tip: Another consideration with traditional IRAs is your beneficiaries. If you have a portfolio of mixed accounts and want to support your charitable causes at the time of your passing, it could potentially save your beneficiaries tax to add the charity as a beneficiary on your IRA VS your other accounts due to the favorable tax benefits of a stepped basis that your heir would receive.
Sample Scenario: Consider a retired couple with a diversified portfolio that may hold a mix of accounts—some with step-up in basis and others with deferred income characteristics. By strategically working with your estate team of an advisor, tax professional, and attorney, you can create a plan that would benefit the family and future generations with their tax liability while also contributing causes they are passionate about. This would strategy achieve philanthropic goals and potentially save tax dollars now and for their heirs.
Key Takeaways:
- A deep understanding of how each account is taxed is critical for effective estate planning.
- Tailored strategies, such as the use of charitable beneficiaries for deferred income accounts, can optimize tax outcomes and preserve wealth.
3. The Strategic Role of Charitable Trusts
Charitable trusts are powerful tools that allow you to remove assets from your taxable estate while fulfilling your charitable goals. Two primary types include:
- Charitable Remainder Trusts (CRTs)
- Charitable Lead Trusts (CLTs)
Benefits of Charitable Trusts:
- Estate Reduction: Removing assets from your taxable estate.
- Flexibility: Options to provide income, either for yourself or for future generations.
- Tax Advantages: Both CRTs and CLTs offer unique tax benefits that can enhance the overall efficiency of your estate plan.
Sample Scenario: Consider a business owner who wishes to fund a charitable initiative while securing a reliable income stream. By establishing a Charitable Remainder Trust, they can receive income during their lifetime, reduce the size of their taxable estate, and ultimately benefit a charity after their passing—all while mitigating the tax burden on their heirs as discussed with their estate team.
Key Takeaways:
- Charitable trusts provide a versatile mechanism to balance philanthropic goals with financial planning.
- They offer the opportunity to support charitable causes now and/or in the future, all while reducing estate taxes.
4. Leveraging Estate Tax Exemptions
Effective estate planning involves more than managing current tax liabilities—it also means planning for future estate tax considerations. By utilizing an estate team of your advisor, accountant, and attorney to explore charitable accounts, trusts, family foundations, and beneficiary designations, you can potentially alleviate the impact of estate taxes as exemptions evolve.
Considerations:
- Estate Tax Exemptions: The thresholds for estate taxes can change over time, affecting the overall tax burden on your estate. It is important to discuss this with your estate team to understand what the changes are as they update and how the changes can impact your current plan. You and your team can discuss strategic updates as needed to make sure your goals are still met. This is an ongoing process, but an important one.
- Charitable Integration: Incorporating charitable elements into your estate plan can help reduce the taxable value of your estate, providing a buffer against future tax changes. There isn’t a “catch all” type of charitable plan. Each strategy is custom to what your goals are, your family needs are, and what tools can help achieve those. That is why discussing the benefits of charitable giving within your estate with your team is important.
Sample Scenario: A family with significant assets might face considerable estate taxes if left unmitigated, which could lessen their legacy for future generations. By strategically designating portions of their estate to charity with the tools discussed with their team, whether it be a trust, a family foundation, or beneficiary updates, they can lower the taxable estate value, thereby preserving more wealth for future generations even as estate tax exemptions shift over time.
Key Takeaways:
- Proactive planning can safeguard your estate against future tax and estate changes.
- Integrating charitable strategies into your estate plan is an effective way to manage long-term tax liabilities as long as it meets your goals
Conclusion
Integrating charitable considerations into your estate planning not only fulfills philanthropic ambitions but also provides meaningful tax benefits and legacy preservation. Whether through periodic beneficiary reviews, establishing charitable trusts, or carefully navigating complex taxation issues, these strategies offer a pathway to both personal fulfillment and financial efficiency. Working with an experienced team, including your advisor, accountant, and attorney will help keep you on track to help achieve these goals.
Overall Key Takeaways:
- Regular Reviews: Keep beneficiary designations and account tax treatments current as laws change.
- Charitable Trusts: Utilizing CRTs and CLTs to remove assets from your taxable estate and support charitable causes.
- Tax Strategy: Understand and strategically plan for the tax implications of different asset types. Review the plans often, and change as laws change.
- Estate Tax Planning: Leverage charitable tools to mitigate future estate tax burdens as discussed with your estate team.
By considering these strategic elements, you can create an estate plan that not only honors your charitable intentions but also secures a robust financial legacy for those you leave behind.
If you would like more information about the terms and strategies discussed in this guide, or if you’re ready to explore how they apply to your specific situation, contact Waverly Advisors. With experience working with individuals, families, and executives managing significant wealth, we specialize in creating tailored strategies with the goal to help you grow, protect, and transfer your assets effectively.
MEET THE AUTHOR
Chrissy Israel, ChFC®
Wealth Advisor
Chrissy joined Waverly Advisors in November of 2024 following the acquisition of Buckingham Advisors by Waverly Advisors, LLC. As a Wealth Advisor at Waverly, Chrissy brings several years of experience in Investment Management, Retirement Planning, Generational Wealth Planning, and Charitable & Family Gifting. Chrissy has attained comprehensive applied knowledge in essential financial planning as a Chartered Financial Consultant® (ChFC®)… Learn More
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