Estate planning and charitable giving: Strategies to make an impact with your estate

Leave a philanthropic legacy that expresses your values, reduces your taxable estate and makes an impact.

For many families, charitable giving is a significant priority for their estate plan, offering the chance to support the causes, organizations or ideas that matter most to them. But charitable giving also provides other estate planning benefits, including different ways to reduce taxes for you and your heirs.

If charitable giving is important to you, we will help determine the ways to incorporate philanthropy into your legacy planning. As you weigh your options, these estate planning and charitable giving strategies could potentially advance your legacy:

In this article:

  1. Direct gifts
  2. Life insurance
  3. Donor-advised funds (DAFs)
  4. Charitable gift annuities
  5. Qualified charitable distributions
  6. Advanced trusts
  7. Private foundation
  8. Questions to discuss with us

1. Direct gifts

One effective way to leave a legacy while reducing your taxable estate is by giving directly to qualifying nonprofit organizations:

  • Gifting cash or other financial assets (retirement accounts, life insurance proceeds, etc.)
    • Charitable gifts given during your lifetime may entitle you to an income tax deduction and also reduce the size of your taxable estate.
    • Charitable gifts made upon your death can reduce your taxable estate through an unlimited charitable deduction, which effectively removes the asset from your estate.
  • Gifting tangible assets (art, real estate, antiques, jewelry, etc.)
    • Charitable gifts given during your lifetime: The size of the income tax benefit can depend on various IRS rules around charitable donations and, for larger gifts, may require an appraisal.
    • Charitable gifts made through a will or trust upon death: The amount of the estate tax deduction is typically the fair market value of the asset.

Advice spotlight

If you have other means of funding gifts to your heirs and loved ones, consider giving the balance of your IRA, 401(k) or other qualified retirement account, to charity tax-free. The nonprofit will not have to pay income taxes on such a gift. By contrast, an heir or loved one who inherits a qualified retirement account may incur a tax liability upon distribution.

Learn more: Giving while living: Make lifetime gifting a part of your estate plan

2. Life insurance

You have several options when it comes to using life insurance policies as part of your strategy for estate planning and charitable giving:

  • Gift a nonprofit an existing whole or universal life insurance policy while you’re alive: The policy is removed from your taxable estate, and the charity will receive the death benefit free from taxes once you pass away. You may be able to take an income tax deduction for the value of the donated policy, as well as any premiums you continue to pay for the policy. Finally, donating a life insurance policy provides the opportunity to amplify giving for the charity, as the death benefit could be much larger than the donation the charity would otherwise receive.

  • Name a charity as a beneficiary of your life insurance policy: This allows you to divide the death benefit among heirs and the nonprofit as you see fit. Because you can change the beneficiary while the policy is in force, it also offers more control than gifting a policy. One drawback is that you do not receive a charitable income tax deduction, and death benefit proceeds will be included in your estate for estate tax purposes, though the portion of the benefit that goes to the charity should qualify for an estate tax deduction.

Learn more: Why naming beneficiaries is an essential part of estate planning

3. Donor-advised funds (DAFs)

DAFs are funds maintained and operated by a qualifying sponsoring organization (often a community foundation, religious organization or financial institution). You make an irrevocable contribution in cash or securities to the fund, and work with the fund administrator to recommend or advise on grants to the organizations of your choosing.

A few considerations:

  • You can take an immediate tax deduction on the amount you contribute (even if funds are not dispersed to charitable organizations until later years), with cash contributions currently eligible for a deduction of up to 60% of your adjusted gross income, and contribution of securities or other assets eligible for a deduction of up to 30% of AGI.
  • You can contribute a range of appreciating assets, including privately held business interests, restricted stock and even bitcoin and other cryptocurrencies.
  • Assets in a DAF are usually managed by a professional investment firm. Over time, this may allow the contributed amount to appreciate in value, allowing larger gifts to charitable organizations at a point in the future.
  • There are administrative costs associated with DAFs, which can make them less cost-efficient than giving directly to the charity of your choice.
  • There are often limitations to the organizations that you can support through DAFs, and they cannot be funded through a qualified charitable distribution (QCD) from an IRA.
  • Assets contributed to a DAF are irrevocable, meaning they are no longer the assets of the donor. While the donor can recommend grants to organizations of their choosing and the desired timing, the sponsoring organization has the final say in granting this money.

4. Charitable gift annuities

A charitable gift annuity allows you to donate an upfront lump-sum to a charity while receiving payouts on a fixed schedule for the rest of your life. Upon your death, the charity keeps any remaining annuity funds. The donation can potentially qualify for a partial charitable tax deduction and you can defer the arrangement so payments begin at a future date.

5. Qualified charitable distributions

A qualified charitable distribution (QCD) is a nontaxable distribution from an individual retirement account (IRA) made directly to a qualifying charity. Neither you nor the eligible charity will have to pay income taxes on the distribution.

You must be 70 ½ or older to make a QCD, and it can count toward your yearly required minimum distribution (RMD) for those of RMD age. A QCD is also not included in your adjusted gross income (AGI), which is used to calculate Social Security taxation, certain Medicare premiums and various tax items.

6. Advanced trusts

For high-net-worth individuals and families, several types of trusts can offer benefits for reducing the size of estates while leaving a legacy for the people, institutions and causes you care about. Here are two of the most common types of trusts used in estate planning for charitable giving: 

1. Charitable lead trusts allow you to provide an income stream to a designated charity for a set number of years while potentially preserving a portion of the underlying assets for your heirs. When the term of the trust expires, any assets remaining in the trust pass to the beneficiaries you’ve designated, such as your children or grandchildren.
Charitable lead trusts can be funded during your life or through a will, and they are often used by those who don’t need the trust’s income while they are alive but want to pass on appreciating assets to their heirs.

2. Charitable remainder trusts are essentially the opposite of a charitable lead trust. They offer a way to provide income to you or your beneficiaries for a set number of years. Once that term ends, the remainder of the trust’s assets go to a designated charity (or charities). Some other considerations to know about charitable remainder trusts:

  • As a “split interest” vehicle, contributions to charitable remainder trusts are eligible for a partial tax deduction, based on the current value of the assets that may eventually pass to the designated charity.
  • Charitable remainder trusts can also help defer capital gains taxes on highly appreciated assets.
  • A charitable remainder trust can help manage estate taxes for your heirs by reducing the size of your taxable estate.

As with all trusts, charitable trusts are subject to specific IRS rules, so work with an attorney and your tax professional when establishing one.

7. Private foundation

For those with significant net worth, setting up a private foundation allows for a hands-on approach to charitable giving, and can create a long-term philanthropic legacy while managing estate taxes. Private family foundations are often created with an eye toward the future, creating a framework for growing charitable assets in a tax-advantaged environment while allowing control to pass to future generations.

  • The foundation can be established and funded on an ongoing basis with cash, publicly traded securities, private stock, real estate or other family-controlled assets. 
  • Family members usually serve as the foundation’s board, deciding how its assets can be used to meet the foundation’s mission through grants to charities or individuals.
  • The foundation generally must disperse at least 5% of its net investment assets every year to comply with the law.
  • You can create a private family foundation while you’re still alive, which will offer immediate income tax benefits, or, upon your death, can provide tax benefits to your estate.

Leave a legacy through estate planning with charitable donations

We will work with you and your estate planning team to help determine charitable giving strategies that reflect your values, potentially reduce your taxable estate and support charitable causes you feel most passionate about.

Questions to discuss with us

  • Which assets should I consider donating to charity?
  • What are my options for passing along retirement accounts?
  • Which charitable giving strategies will help make a big impact on the causes I care about most?