One of your main estate planning goals is to minimize your tax burden. As you age, you may also start to consider what legacy you will leave behind. One way to reduce your taxes and feel good about yourself at the same time is through charitable giving.
Giving to charity through your estate plan may sound like you are giving away your wealth to somebody else instead of your family, but it may help you eliminate taxes. This way, you can do what you please with your savings. Here are a few guidelines for achieving an estate plan with no tax consequences:
1. Make lifetime charitable donations
Making lifetime gifts to charity can result in a significant income tax break. If you have any highly-appreciated securities, you may want to give them to a charitable organization during your lifetime. Not only will you benefit from an income tax deduction, but you will also bypass any capital gains tax burdens. However, make sure you get professional advice before you make huge gifts because there are limits to the tax deductions.
2. Create a charitable trust
There are two trusts that are designed to help you give to charity:
- Charitable remainder trust: A CRT lets you place highly-appreciated assets or cash and claim an income tax deduction. Once the term finishes, the remaining assets go to charity.
- Charitable lead trust: This type of trust is essentially the inverse of a CRT. It allows you to give to charity during your lifetime, and the remaining assets go to your beneficiaries at the end of the term.
The type of trust you select should depend on the type of assets you have.
3. Designate a charity on your retirement account
Retirement assets can come with hefty taxes. Leaving your retirement account funds to charity reduces estate taxes for your family and increases the impact of your donation. Make sure you designate beneficiaries according to the plan rules.