In 2023, Americans gave a combined $557.16 billion to charitable groups, according to the National Philanthropic Trust. High-net-worth individuals lead the way in giving, accounting for 38% of all individual donors worldwide. Especially for high-net-worth individuals, philanthropy is simultaneously a personal calling, a way to build a lasting legacy for the family name around a good cause, and a strategy for managing how their wealth is taxed. With all that in mind, it’s not surprising that there is such a significant overlap between charitable and estate planning strategies.
As one grows older, the wealth one has accrued in life continues to support not only one’s family but also the causes near and dear to one’s heart. Even long after one’s passing, with a strategic estate plan that takes charitable giving into account, one’s wealth can continue to provide for both one’s descendants and beneficiaries and the causes one supported in life.
In this article, we are going to examine how charitable giving and financial planning for your estate can—and should—be tied together in your overall wealth preservation strategies to ensure that there is no question about how your wealth will support your charitable interests as well as your family after you have passed away.
The Benefits of Philanthropic Financial Planning
Why should you combine your wealth preservation, estate planning, and charitable giving strategies? Think about the overall importance of estate planning to your financial legacy—an ironclad plan ensures that your beneficiaries do not need to make hard decisions on their own or get into contentious arguments about what your wishes for your estate were and where your money goes when you pass on. Who receives what and how and when they receive it are all accounted for.
Taking into account charitable giving in your financial planning strategies:
- Empowers you to claim significant tax benefits, such as estate tax reduction, income tax benefits for your heirs, or avoidance of certain capital gains taxes, that preserve more of your wealth’s overall value for the heirs and charities included in your beneficiaries.
- Allows you to define your personal and family legacy in alignment with your values. How you choose to enshrine your charitable actions in your estate plan can encourage your heirs to continue in the tradition of giving you have established on their own.
- Enables you to establish endowments or foundations that provide ongoing funding to your causes of choice, ensuring that your impact on the world of philanthropy persists long after your lifetime.
- Helps you avoid tax liabilities to preserve the value of your wealth and maximize its positive impact on your heirs and the causes you support.
- Sets clear boundaries on portions of your estate designated for charitable purposes, reducing potential conflicts between your beneficiaries.
- Ensures that the next generation of your family is not overburdened with excessive wealth or tax liabilities while still providing for them financially.
- Prevents you from losing control over your charitable intentions after you have passed on.
- Encourages your heirs to responsibly steward their wealth and avoid mismanagement or excessive spending.
By making sure your wealth preservation strategies include philanthropic financial planning, you head off a lot of potential issues that can result in mismanagement of your wealth after your passing and ensure that your wealth continues to be applied prudently and responsibly to where it is most needed, just as it did when you were still alive.
Exploring Charitable Estate Planning Strategies
For many passionate philanthropists, their charitable organizations of choice are just as much their beneficiaries as their spouses, children, and grandchildren. But legally speaking, charities are not the same type of beneficiary as your human family members, and different strategies must be employed to ensure they receive their fair share. There are many considerations to keep in mind in estate planning,
Examples of effective charitable financial planning strategies to include in your overall estate plan include:
Charitable Remainder Trusts (CRTs)
When you put your assets into a charitable remainder trust, income from those assets go to your designated beneficiaries for a set period, or for their lifetimes; after that, all remaining assets go to the charity of your choice. Using CRTs for philanthropic financial planning allows you to receive immediate charitable income tax deductions and avoid capital gains taxes on appreciated assets.
Charitable Lead Trusts (CLTs)
While CRTs distribute a set amount of your wealth to your heirs over a set period of time and distribute the remainder to charity afterward, CLTs do the opposite. A CLT provides a steady stream of income to a charitable organization for a set term, then transfers the remaining assets to your non-charity beneficiaries. Using CLTs for charitable estate planning allows your beneficiaries to receive your assets after they have grown in value.
Donor-Advised Funds (DAFs)
Setting up a DAF investment account can be an effective and efficient strategy for charitable wealth planning. A DAF allows donors to contribute assets to a charity of choice and receive an immediate tax deduction while controlling the timing of their donations. Your assets can grow tax-free until the time is right to distribute them to your charities.
Private Foundations
As you near your twilight years, setting up your own private foundations to support a cause can be an especially effective way to connect estate planning and charitable giving. By setting up your own private foundation as a family LLC or trust, you can set in place a system for ensuring regular funds for your chosen cause. Foundations allow for ongoing charitable giving and tax benefits while allowing your family to contribute to your legacy of philanthropy.
Gifting Appreciated Assets Directly to Charity
While there are no capital gains taxes at the state level in Tennessee, you can avoid federal capital gains taxes and preserve the full value of your charitable donations by setting up your estate plan to donate assets such as stocks or real estate directly to charity.
Including Bequests in a Will or Living Trust
Adding a simple provision to your will or living trust can allocate specific assets or a percentage of your estate to charity upon your passing. Including this straightforward, simple, flexible form of charitable giving in your financial planning ensures your assets avoid probate and preserve more of their value for your charity.
Transfer Ownership of Life Insurance Policies
Another way to combine estate planning and charitable giving is to name a charity of your choice as the beneficiary of a life insurance policy or transfer ownership of a life insurance policy to the charity. Doing so provides an immediate income tax deduction, while naming a charity as the beneficiary provides estate tax deductions.
Build Your Estate Planning and Charitable Giving Strategies with MHPS Law
Strategically developing your estate plan for wealth preservation and ongoing philanthropy isn’t easy. Maximizing the good your wealth can do for your family and your charitable cause requires a close knowledge of both federal and state tax law, as well as your state’s unique laws around estate planning.
As your life goes on and your wealth continues to build up, having your estate plan up-to-date and in line with your philanthropic wishes is essential for preserving the legacy you have built. For help navigating Tennessee estate laws to best integrate charitable giving into your financial planning, schedule a consultation with our Nashville estate lawyers today.
