Weave Charity Into Your Estate Plan – According to the current rules and regulations, people who are both retired and at least 70 1/2 years old are eligible to donate upwards of $50,000 from their individual retirement accounts to charitable causes.
Now, charitable gift annuities offer benefits to both those who give the money away and those who receive the money. Plus, as someone giving a donation to a charity, you can also accrue more money through your charitable donation via charitable trusts, which allow you to generate income.
Charitable trusts have existed for a long time as a way for people to set up their assets in a way that benefits them. However, it doesn’t only take your best interests into consideration.
Charitable trusts also benefit your beneficiaries as well as a charity of your choice. As such, charitable trusts offer a plethora of financial advantages for philanthropically minded folks with nonessential assets, such as stocks or real estate properties.
How do charitable trusts work?
Charitable trusts lower the amount of money that you owe in taxes thanks to the tax deductions that are associated with them. The charitable gift annuity is funded by IRA dollars with the goal of lessening your personal tax responsibilities.
It can also provide you with monthly income for the rest of your life. Similarly, charitable trusts are similar in the sense that you can donate to charities of your choice through the assets in your trust while simultaneously receiving a tax deduction in exchange for your donations.
Charitable trusts are categorized in two ways: There are lead trusts and there are remainder trusts.
A charitable lead trust refers to an account where a portion of the proceeds is donated to a charity of your choice. You’ll receive a deduction that is equivalent to your charitable donation. After the donation is distributed to the charity of your choice, the remaining funds will be distributed to your beneficiaries.
On the other hand, a charitable remainder trust is an option that generates income for you based on the assets that you place in the trust. You’ll receive a tax deduction in relation to the value of the assets in your account as long as said assets are designated as donations to charity.
However, in order to open a trust account and allocate donations to a specific charity or charities, the charity or charities must qualify as an option and be approved by the IRS. Otherwise, you might not receive any charitable deductions through your donations.
Charity-related financial strategies give you the opportunity to make an impact on the world. Plus, they can make it possible for you to give to those in need even after you’re gone.
Better yet, the tax incentives and financial benefits can result in an income stream for you for the rest of your life. And in the case of charitable trusts, you can avoid paying capital gains on real estate or stocks when selling them at higher values than they are currently ranked.
What should you do?
Whether or not you open a charitable trust will depend on your age and your financial goals. If you’re nearing retirement, the opportunity to give to charity and receive an income for life while taking care of your required minimum distributions for tax purposes can have quite the ring to it.
However, if a reduction of your estate taxes is more so what you’re looking for, then you can opt for a charitable trust that eliminates probate for your beneficiaries. At the same time, it will create an income stream for you as well as an abundance of inheritable assets for your beneficiaries. Plus, you’ll still earn the charitable tax deduction in accordance with current IRS rules.
Two strategies worth considering
Let’s take a close look at two specific strategies that you may want to consider:
- Establish a donor-advised fund. This will allow you to select the charity or charities you want to contribute to.
- Consider replacing assets for your beneficiaries. As an example, you can buy a life insurance policy and use the income that is produced by the charitable remainder trust to pay for the policy premiums. You can still use the remainder to fund your charitable intentions as well.
By setting aside money for charities while benefiting from tax advantages, you’ll also get to leave your legacy behind once you die. If having a say, while you’re still alive, over how and when your income should be distributed appeals to you, then charitable trusts may be worth looking into more closely.
Also, it’s important for older folks to note that charitable gifts that count toward your required minimum tax distributions are tax free. So, rather than having your withdrawals taxed as income, they will evade the accrual of taxes.
In exchange for your charitable donations, the charities will agree to make fixed annual payments to you for the rest of your life. From there, any money that remains when you pass away will be allocated to the charity you’ve donated to.
This is just a summary of charitable taxes. Remember that there are plenty of other provisions, advantages and disadvantages regarding charitable trusts. All of these charity plans have their own moving parts, and while it’s imperative that you choose the right vehicle for your goals, it can be hard to sort out what is right for you on your own. Reach out to an estate planning expert for greater insight into the best option for you.
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