Q: Should I make charitable gifts during life or after death?
A: It depends on your goals and circumstances. Donating to an IRS-qualified public charity or private foundation while you are alive may qualify you for an income tax deduction. A donor’s adjusted gross income determines the deduction available in return for charitable giving. However, charitable giving after death has estate tax benefits if the value of your estate nears or exceeds the state or federal estate tax exemption.
Donor-Advised Funds (DAFs) or Charitable Lead Trusts (CLTs) can be used to charitably gift during life. DAFs allow you to contribute cash or investments to a fund managed by a charity or financial institution. DFA funds grow without income tax consequences. A donor can recommend grants be made to charities during life or have the fund donated at your death after years of appreciation. Alternatively, CLTs allow donors to transfer assets to an irrevocable trust and pay the income generated from the trust assets to the Charity.
When the donor dies, the remaining assets pass to the donor’s family or non-charitable beneficiaries. There are income tax benefits available to the donor. At the donor’s death, the CLT assets transferred to beneficiaries free of capital gains. Charitable giving after death can be achieved by naming a charity as beneficiary of a life insurance policy or retirement account, making bequests in your Trust or Will, or through the creation of a Charitable Remainder Trust (CRT). CRTs allow you to transfer assets to an irrevocable trust and the income generated from the assets can be paid to non-charitable beneficiaries for a specific period.
When the donor dies, the charity receives the assets left in the CRT and that value determines the estate tax deduction. Similarly, if you name a charity as beneficiary of a retirement account or life insurance policy, the asset is not includable in the donor’s estate value, and the charity receives the asset income tax-free. If gifting to a charity pursuant to a Trust or Will, the gift’s value is excludable from you the value of your taxable estate. You can also include a provision in your Trust or Will known as a “Santa Clause” which allows assets to pass to named charities if the beneficiaries choose to give.
This is often used if the estate’s total value exceeds the state or federal estate tax exemptions.
You should work closely with your accountant, financial advisor, and estate planning attorney to decide which options are most appropriate and practical for you.
Erin Cullen, Esq. and Britt Burner, Esq.
Erin Cullen, Esq. is an associate attorney at Burner Prudenti Law, P.C. focusing her practice areas on Trusts and Estates. Britt Burner, Esq. is the Managing Partner at Burner Prudenti Law, P.C. focusing her practice areas on Estate Planning and Elder Law. Burner Prudenti Law, P.C. serves clients from New York City to the east end of Long Island with offices located in East Setauket, Westhampton Beach, Manhattan and East Hampton.