Crowded Estate Plans Keeping Your Charity Out in the Cold?

Many donors will say that they would like to include your charity in their estate plans but feel more obliged to support children and grandchildren, or perhaps even other living relatives or friends in need. When an estate plan crowds out charitable giving, what is your best strategy to avoid disinheriting the people they care about and still finding a way in?

First, let's clear one thing up, tax breaks in and of themselves are not going to elevate charitable giving over their desire to help individuals heirs. Paying for a grandchild's education is far superior than providing scholarship support for kids they will never know. Donors do not make gifts solely based on tax deductions, never have, never will. That does not mean, however, that smart tax planning can't provide the incentive, the little extra push, to at least crack open the door to a conversation about doing both. This, my friends, is the key: Support the "and" frame-of- mind, not the "or". Meaning, "Let's see how we can provide support to ABC AND XYZ", not ABC OR XYZ. Make sense??

There are charitable ways to do this and non-charitable ways. Since this blog is focused on charitable gift planning, I'll stick with that, but know there are other options out there, many of which utilize life insurance as a wealth replacement vehicle for those healthy enough to qualify.

I'm also going to assume that you know and can accurately describe the various tax ramifications of qualified and non-qualified assets as income taxable and capital gain taxable assets respectively. This knowledge is critical to both everyday estate planning and charitable estate planning.

One of the best and most efficient ways to do this is to establish a testamentary charitable split-interest gift, such as a charitable gift annuity, or charitable reminder trust that transfers an asset that might currently be earmarked for individual heirs to one of these alternatives that creates an income stream for those living heirs and defers a gift to charity. There are benefits on both sides of this strategy- the living heirs are not saddled with the liability and risk of a large lump sum inheritance that might be subject to unhealthy spending, waste, and needless tax bills, and of course on the charitable side of the equation, a deferred gift is better than no gift at all, is it not?

One such case is made even more beneficial to all parties in light of the Secure Act's removal of the "Stretch IRA" provision that many people still believe exists. Take for instance, a child who stands to be the sole beneficiary of their last surviving parent's IRA. That child will be required to withdraw the full amount within 10 years, likely during their peak earning years, resulting in staggering losses to high income tax rates. Alternatively- that parent could establish a Testamentary CRT or CGA that could accept those funds, establish a lifetime income stream (or period of years up to 20) for that heir, and still leave a charitable legacy.

Next time a prospective donor tells you their estate plans are full invite them to have a conversation that explores the end results of that plan to make sure they understand that plan in action and help them see if/how charitable interests might actually make everything, and everyone, better off in the long run.