The top 2023 ordinary income tax rate is 37% plus state taxes. Careful planning stretches your dollars to benefit you now and, eventually, the people and charities you love. Note: The Tax Cuts and Jobs Act, signed into law in December 2017, doubled the gift and estate tax basic exclusion amount and the GST tax exemption to $11,180,000 in 2018. Under the current law, the amount will revert to its pre-2018 levels of about one-half of $12,092,000.
A charitable lead trust pays income to your chosen charity for several years after your death. Once that period ends, the trust principal passes to your family members or other heirs. The trust is known as a charitable lead trust because the charity gets the first, or lead, interest. A charitable remainder trust is the mirror image of the charitable lead trust. Trust income is payable to your family members or other heirs for a period of years after your death or for the lifetime of one or more beneficiaries. Then, the principal goes to your favorite charity. The trust is known as a charitable remainder trust because the charity gets the remainder interest. Depending on which type of trust you use, the dollar value of the lead (income) interest or the remainder interest produces the estate tax charitable deduction.
If you have charitable intentions consider these three strategies.
Make an outright bequest in your will or trust. The easiest and most direct way to make a charitable gift is by an outright bequest of cash in your will. Making an outright bequest requires only a short paragraph in your will or trust that names the charitable beneficiary and states the gift amount. The outright bequest is especially appropriate when you do not have tax-deferred retirement accounts or want the funds to go to the charity without strings attached. Make a charity the beneficiary of an IRA, retirement plan, or annuity. You can name your favorite charity as a beneficiary of an IRA, employer-sponsored retirement plan, or tax- deferred annuity. Naming a charity as a beneficiary can provide double tax savings. First, the charitable gift will be deductible for estate tax purposes. Second, the charity will not have to pay any income tax on the funds it receives. This double benefit can save combined taxes that otherwise could eat up a substantial portion of your retirement account. Use a charitable trust. Another way to make charitable gifts is to create a charitable trust. There are many types of charitable trusts, the most common of which include the charitable lead trust and the charitable remainder trust.
Note: There are costs and expenses associated with creating these legal instruments.
If charitable giving is not currently a part of your financial plan, consider discussing this with your wealth advisor. We can develop a charitable giving plan that not only creates tax benefits but also assist in discovering giving opportunities that align with your values and passions to forge a sense of personal satisfaction, knowing your gifts impact those who need them the most.
ESTATE PLANNING | TAX PLANNING
Charitable Giving Basics
Tia Lee CFP ® , CTFA Director of Wealth Planning
Charitable giving can play an essential role in many estate plans while giving you the personal satisfaction of supporting your favorite charities. There is a long list of tax- efficient gifting strategies, defining how much you want to give, when to give it, and to whom is the place to start. Gifts during your lifetime primarily focus on income tax reduction, while gifts at death primarily focus on estate tax reduction.
A few words about estate taxes and income taxes The federal government taxes wealth transfers made to individuals over specific amounts during your life or death. In 2023 any person can transfer $12,092,000 estate tax-free, double that for a couple. The tax-free amount is called your lifetime estate tax exclusion amount. Transfers above your exclusion are subject to roughly a 40% estate tax. Note that some states still have inheritance taxes to consider as well. Gifts to charities give your estate a charitable deduction similar to a charitable deduction on your income tax return.
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