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Estate Planning 101: Making Bequests to Charity

Change jar spilling coins
Posted on March 29, 2023 by Amanda Whitely

Many clients opt to make charitable donations to further charitable intentions and to perhaps help reduce estate tax exposure in the process.  Charities often fulfill needs and perform work that the government does not otherwise provide, and supporting a charity can stretch one’s dollars further as charities can be more efficient with the contributions than the government. To this end, one of the things that helps keep a charity accountable is the organization’s tax return, which should be accessible by the public.  A tax return should disclose the organization’s income and donations and how they are allocated across the organization’s expenses, charitable purposes, and otherwise.  When donating to a charity, it is important to make sure: 1) the charity is vetted and poised to fulfill the donor’s charitable intent; 2) the appropriate asset is gifted to maximize estate planning objectives without compromising the amount donated to charity, and 3) the appropriate formalities are followed to effect charitable intent and to support taking a charitable deduction on a tax return.

Washington has its own estate tax regime in addition to the federal estate tax and it does not take many assets for a Washington resident to be subject to the Washington estate tax.  For example, appreciated real property combined with modest retirement savings and some life insurance can lead to a taxable estate. For 2023, the Washington estate tax exemption is $2,193,000.  If an estate exceeds the Washington exemption amount, the estate is taxable and subject to a graduated tax that begins at 10% and tops out at 20%. The federal amounts are much higher.  In 2023, the federal gift, estate, and generation skipping transfer tax exemptions are $12,920,000 per person (which is indexed for inflation and is expected to increase through 2025 before it is to be cut roughly in half beginning in 2026).  If an estate exceeds the federal exemption amount, the estate is also subject to a 40% estate tax.

One way to maximize the amounts left to heirs and to charity is to use a retirement account for charitable gifting.  This is because retirement accounts have income that would be taxable upon distributions to heirs.  If a retirement account is donated to charity, the charity does not pay income tax on the account because it is a tax-exempt organization.  This would create a deduction against estate taxes and prevent the imposition of income taxes for heirs. It could also allow for other assets without income taxes to be left to heirs. Understand that this is a general example and one should first consult with an estate planning professional before making any such bequests or designations.

It is important to ensure the organization qualifies as a charitable organization and that the donation is sufficiently documented to take a charitable deduction.  The Estate will need to submit evidence to establish its right to the deduction.  Additionally, the IRS has provided some flexibility for making charitable bequests by allowing deductions for contributions to a donor advised fund (the “DAF”).  However, there are a few rules and restrictions that should be reviewed and evaluated for this type of a bequest to be eligible for a deduction.

Subject to applicable limitations, the amount of a charitable deduction is generally the fair market value of the transferred property that is included the gross estate of the deceased donor.  If property is transferred to charity that is not included in one’s gross estate, the value of the donation is generally not includable in the amount of the charitable deduction.  Another benefit of a bequest to charity is the deduction is not subject to the percentage limitations that are applicable to charitable deductions for gifts made during life. For example, a decedent can give 100% of his or her assets to charity and receive the full deduction, whereas charitable deductions for gifts are generally limited to 50% (or higher for cash gifts and lower for other types of gifts) of the taxpayer’s adjusted gross income for the year of the donation.

The Estate Planning Attorneys at Lasher Holzapfel Sperry & Ebberson PLLC are available to help you formulate your philanthropic strategies and design an estate plan with your goals in mind.