For Myself/Spouse

Estate Taxes

Currently, estate taxes impact less than one percent of the population simply because the exemptions are so high. In 2020, everyone has the ability to pass at death, tax-free, up to $11,580,000.00 (this amount can be lowered if you have gifted in excess of the annual exclusion amount in any year prior to death). If you do have a taxable estate and you are charitably inclined, one of the options you have to lessen your tax liability is to donate some of your estate to charity.

Any amount you donate to charity reduces the amount of your estate subject to estate taxes. You can use this planning method to pass your estate to individuals with a lesser tax bill or even avoid the tax bill entirely.

As a very simplistic example, if you had an estate at the time of your death in 2020 that was valued at $12.0 million dollars, you would have a tax liability of $420,000 (calculation is $12,000,000 - $11,580,000 = $420,000). If you allocated $420,000 to charities that qualify as such under the IRS code, you could avoid paying the estate tax altogether. You can also choose to donate lesser amounts and simply reduce the tax liability rather than avoiding it entirely. Obviously, you must discuss your individual situation with your team of professional advisors, but this is an option that works well for many people that have an estate tax issue and would like to incorporate philanthropic endeavors into their planning.

Income Taxes & Capital Gains Taxes

Unlike estate taxes, income taxes, and capital gains taxes apply to a significant portion of the population, and it is a concern we discuss with many of our clients. This is another area where being charitably minded can provide you with options to lessen your tax burden through planning to include distributions to charitable entities that qualify under the IRS code.

There are different ways that you may have income or capital gains subject to tax in your estate after you have passed away. Pretax funds such as IRA, 401k, or 403b accounts have nothing but income that has yet to be accounted for tax-wise. This income tax that you, as the account holder, have not yet paid, does not just disappear after you have passed away. Someone still must pay the tax due on the funds.

Related Article: Planning for Retirement Accounts

You may also have capital gains taxes on assets that have appreciated in value over time, such as stock or real property. These assets may receive a basis adjustment at your death (meaning the asset is revalued as of the date of death), but, if they do not, then your heirs may be hoping that you have incorporated some charitable planning in your estate to address the tax issues.

If you have assets in your estate that have these built-in tax liabilities, you may choose to allocate these assets to charities instead of passing them to individuals. If you pass the assets with the income or capital gains tax liabilities to qualifying charitable entities, both your heirs and the charities can avoid paying any of the tax due on the assets. Essentially, qualifying charities are not subject to income or capital gains taxes (again, this is a simplified explanation that does not address exceptions and individual circumstances), so charities are thrilled to receive assets with these tax liabilities because they will not pay them anyway.

Just like many of the other planning techniques mentioned here, it is imperative that you consult with your professional team of advisors to implement a plan such as this. There are many requirements in how you allocate these assets and the language you use in your planning documents that, if done incorrectly, could completely negate the tax savings. Working with an experienced Estate Planning Attorney can help you ensure the tax planning will be effective when it is needed, and you can also explore some of the individualizing discussed earlier that gets your family involved and/or more specifically represents your charitable intent.

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