charitable giving, money in a jar

‘Tis the Season: Gifting And Charitable Giving Through Estate Planning

While estate plans are thought of primarily as means to pass on property to relatives, they can also be used to provide gifts and charitable donations to those outside the family. Using an estate plan for gifting and charitable giving is a rather common occurrence. These plans can even reduce tax liability for individuals, their estates, and their heirs. With the holiday season upon us, you may be considering one of these plans. Discuss your options with SederLaw’s Estates & Trusts team today.

What Is Gifting and Charitable Giving?

Gifting refers to making gifts to other individuals during your lifetime. Such gifts are potentially taxable to the givers but not the recipients. By giving away annually to loved ones, charitable causes, and others, you can reduce your estate’s tax liability when you die. Your estate may not have any tax liability if the value of it falls below the state or federal estate tax limit.

Federal law allows an individual to give away $15,000 (known as the exclusion amount) per year without incurring a gift tax. Because a spouse can also give away $15,000 annually, this means both of you combined can give $30,000 annually without worrying about the tax consequences of those gifts. Massachusetts does not have its own gift tax.

Some individuals give away more than the $15,000 annual limit. But there is also a lifetime exemption amount that allows them to avoid paying gift tax unless and until their total lifetime donations exceed the threshold (which is currently $11.7 million per individual). In other words, you can use some of your federal estate and gift tax exemption to cover anything over $15,000 you give away annually.

It should be noted that the same federal lifetime exemption for giving mentioned above is the federal estate tax exemption. When you die, you can leave up to $11.7 million (adjusted annually for inflation) to family and friends without incurring federal estate tax. The state limit for residents of Massachusetts is $1 million, so your estate could still owe taxes to the Department of Revenue. Be sure to ask an attorney about the potential tax consequences of your estate plan.

Charitable Giving Strategies

There are several other ways to use your estate for charitable giving:

Bequests. A bequest is simply property given to others by an individual’s last will and testament. You can choose to give to charities through a bequest in your will. By planning to give through your will, you can donate money after your death which you didn’t need during your lifetime for financial and other expenses.

Life insurance and retirement plan beneficiaries. A charitable organization can be listed as a beneficiary to your life insurance policy or retirement plan. Talk to your life insurance company or retirement plan administrator if you wish to do this, and obtain documentation that the charity of your choice has been properly identified in your plan.

Giving property and retaining a life estate interest. Some individuals choose to donate property to a charity and retain a life estate interest in that property. This allows them to live on and use the property during their lifetime, and to have it pass to the charity upon death. Doing this also allows you to take a deduction on your taxes.

You should be aware that if you give away property and retain a life interest, the recipient of that property owns it. Although you can use the property during your lifetime, you cannot sell it. This means, for example, that you won’t be able to sell the property and use the proceeds to cover unexpected expenses that may arise later.

In creating an estate plan, you will want to ensure that it provides for any desired charities or gifts to individuals. You should also understand the potential state and federal tax consequences for gifting during your lifetime and for the total value of your estate upon death. The knowledgeable attorneys of SederLaw are ready to assist. Give us a call today to discuss gifting and charitable giving through your personalized estate plan.