By: Barry E. Haimo, Esq.
January 24, 2019
3 Ways Charitable Giving Can Go Wrong
Charitable gifts allow estate holders to build a legacy and support a cause that they hold dear. If planned correctly, they can help your estate pass on more money to the organizations and individuals you care about — and pay less to the government in taxes.
However, before you engage in charitable giving, it’s important to be aware of the following ways that it can go wrong.
Failure to Document Properly
This is the most basic mistake. It is not enough to simply share your intentions with a loved one or to write up a note about what you want done. You should have legally binding documents in place.
If not specifically authorized to do so in your estate documents, your trustee or executor may not be legally allowed to make a charitable contribution and/or to take advantage of the related deduction.
It is also important to ensure you get and retain the right documentation after the contribution is made. Make sure you receive a receipt from the charitable organization, which usually must be a 501(c)(3) for your donation to qualify for a tax deduction.
Failing to Consider the Estate Tax
There are ways to allocate charitable giving and inheritance so that beneficiaries can pay less in taxes and receive more funds.
Let’s consider one example. A couple has $30 million in assets: a $10 million home, a $10 million IRA, and a $10 million after-tax savings account. After the couple dies, their $10 million home and $10 million IRA gets passed on to their children. The couple’s estate donates $5 million from the after-tax savings to charity, and the other $5 million goes to the children. The children must pay taxes on the IRA funds, whether they receive them in a lump sum or in distributions over time.
However, if the couple decides to donate $5 million from the IRA instead of the after-tax savings account, the children will receive more since their assets will be received after taxes. And the charity will still receive the same $5 million because they are not required to pay taxes on the amount.
This issue only concerns estates larger than $11 million due to the recent Tax Cuts and Job Act.
Unanticipated Results When Using Charitable Trusts
With both charitable lead trusts and charitable remainder trusts, assets are placed in a trust, and an income is paid from from the trust for a specified period of time. Then, after that time is over, the remaining assets are distributed.
The main difference between the trusts is who gets the annual income and who gets the remaining assets.
With charitable lead trusts, the charity is paid the annual income. When that period ends, the grantor or other beneficiaries get the remaining assets. The danger is that the beneficiaries may not receive as much as originally intended if the assets’ value decreases during the trust term.
With charitable remainder trusts, income is paid to the beneficiaries until the end of the term. Then the remaining assets are distributed to charity. The potential issue here is that the income generated may not be as high as anticipated if the asset’s value falls during the trust term.
Both types of trusts are irrevocable, which is why careful planning is crucial.
Giving a Percentage of Your Estate May Give Away More Rights Than You Realize
When you choose to designate a percentage of your estate to give, the charity now has more rights than they would if you had given a specific amount. This is because they have an interest in how the money is spent to arrive at that percentage.
Another way to limit liability and interest is to give a specific asset since the charity would then only have an interest in that asset — not the entire estate.
These are just a few examples of charity giving gone awry. The best way to protect your estate and your wishes is to work with an experienced estate planning attorney.
Barry E. Haimo, Esq.
Strategic Planning With Purpose®
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