Advancing Charitable Giving Can Bring Tax Savings


Written by: Jon McGraw

I recently met with Elmer and Grace. Their estate plan is to leave a good portion of their assets to two charities. They put this in place because they don’t have children, didn’t feel their extended family members needed the money, and they wanted to leave a real legacy to a couple of causes that were close to them.

Their situation: Ages 80 & 71, they have about $2,000,000 in investment assets, their income is derived from several sources including pension plans, annuities and Social Security. They also withdraw about $24,000/year from investments. They live in an upscale retirement residence, still travel regularly and all their current financial needs are met. Their estate plan was defined through Wills they had updated four years ago.

As we discussed their situation, it became clear that every year they had more income than they needed and a big tax bill to pay. And to make matters worse, each year this tax bill continued to increase. While it seemed as if their estate plan made sense, and shouldn’t really have anything to do with their tax bill, we reviewed a couple of facts.

  • By leaving money to a registered charity they would receive a charitable tax credit in the year they made the gift. If they waited until they died the credit will only reduce their tax bill in the last year of their life. If their final charitable gift is large (in the case of Elmer and Grace it would be more then $1,000,000) they would have foregone hundreds of thousands of dollars ot tax credits over they years – a real missed opportunity!
  • Estate plans with large charitable giving occasionally are contested by family members who feel that they should have received more. This can cause lots of delays, legal costs and heartache. All can be avoided by giving to the charities outside of the Will.

They agreed to have a planning meeting with their CPA and Attorney. Together we talked through various scenarios and determined the best way to address their current tax problem, and their desire for assets to go to charities, was through a 2-step process.

  1. The adoption of a revocable living trust
  2. Begin a strategy of giving annually to their two charities

Their current plan of using a Will to direct assets to charity would require the involvement of the probate count system and would make their charitable gifts public knowledge. By including a revocable living trust they would be able to avoid any delay and cost of probate as the assets were going to charity. Second, by giving to charities annually rather than at death, Elmer and Grace would almost always be in a position to receive the full charitable tax credit so they could reduce their tax bill each year. A third advantage included the fact that their annual charitable gifts also reduced the tax implications of the money in non-retirement accounts as well the tax implication of their Required Minimum Distributions (RMDs) from their retirement assets. The fourth advantage to this strategy would be the significant flexibility they would have in terms of how much to give, who to give to, and be able to change their minds any year they wished. And the fifth advantage; the charities would also benefit by receiving assets today instead of having to wait for many years.

For Elmer and Grace, the “Family CFO” result was a win-win. They were able to reduce their current tax bill, while at the same time be able to see the impact of a least some of their giving!

Leaving significant money to charity can be of great value to you, the charity and society at large. However, if the plan is to simply leave it through your will, there are likely many other smarter ways to make a bigger impact with the same funds. If you would like to learn more about what Buttonwood’s “Family CFO” services could mean to you, please contact John Jespersen to set a strategy appointment at 816-285-9000 or by clicking HERE.

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