Exploring the world of estate planning charitable giving can be a rewarding venture for Texas residents. In this blog, we’ll delve into the various options available for incorporating charitable giving into your estate plan. You’ll also discover the potential tax benefits that can make philanthropy not only a noble gesture but also a financially wise decision. Let’s uncover how you can leave a lasting legacy and positively impact the causes you care about through strategic estate planning
Types of Charitable Giving in Texas
There are several types of charitable giving strategies that can be included in a Texas estate plan. Here are some of the most common ones:
1. Bequest
A bequest under charitable giving is a provision in a person’s will or living trust that directs a certain amount of money, property, or assets to a charitable organization after the person’s death. Essentially, a bequest is a way to support a charitable cause or organization that is meaningful to the person making the will or trust.
Different types of bequests can feature in wills or living trusts:
- Specific Bequest: A donor bequeaths a specific money amount or a particular asset, like a property, to a charity.
- Residuary Bequest: After fulfilling all other bequests, a donor bequeaths all or part of the remaining estate assets. Often, this involves leaving a portion of the estate to a charity after making specific gifts to family and friends.
- Contingent Bequest: This bequest activates only under certain conditions, such as if the primary beneficiaries pass away before the testator.
Bequests serve as an effective means for supporting charities that reflect a person’s values and beliefs. However, consulting a qualified estate planning attorney is crucial to ensure the bequest is correctly drafted and executed according to the individual’s wishes.
2. Charitable Gift Annuities
In a charitable gift annuity, a donor and a charitable organization in Texas engage in an agreement. It is an agreement between a donor and a charitable organization in which the donor makes a gift of cash or other assets to the charity, and in return, the charity agrees to pay the donor a fixed income for life. The donor transfers assets, such as cash or securities, to the charitable organization, which then uses those assets to purchase an annuity from an insurance company. The annuity provides a guaranteed fixed income to the donor for the rest of their life. The donor also gains an immediate tax deduction for the gift, calculated based on age and current interest rates.
The income payment amount depends on the donor’s age at the gift time, the gift amount, and the annuity rate the insurance company offers. Generally, older donors get higher annuity rates and income payments. After the donor’s death, the annuity’s residual assets transfer to the charity, aiding its mission.
3. Charitable Lead Trusts
In Texas, a charitable lead trust (CLT) supports charitable giving strategies. This trust provides a fixed or variable income to charitable organizations for a set period. Afterwards, the remaining assets go to non-charitable beneficiaries like family or heirs. CLTs come in two forms: charitable lead annuity trusts (CLATs) and charitable lead unitrusts (CLUTs).
A CLAT pays a fixed yearly amount to charities for a specified time, then transfers the remaining assets to non-charitable beneficiaries. A CLUT, however, pays a fixed yearly percentage of trust assets to charities for a specified time, before distributing the remaining assets to non-charitable beneficiaries.
4. Charitable Remainder Trusts
Charitable remainder trusts (CRTs) form part of Texas estate planning for charitable giving. A CRT is an irrevocable trust offering income to a designated beneficiary for a specific period. After this period, the trust’s remaining assets go to a charitable organization. CRTs exist as charitable remainder annuity trusts (CRATs) and charitable remainder unitrusts (CRUTs).
In a CRAT, the beneficiary receives a fixed annual income, set at the trust’s establishment, unaffected by asset performance. In a CRUT, the beneficiary’s income, a fixed percentage of trust assets set at establishment, varies annually based on asset performance.
5. Pooled Income Funds
A pooled income fund in Texas allows multiple donors to add assets to a single fund managed by a charitable organization. The fund’s income is distributed to the donors and a designated charity or charities, relative to each donor’s fund interest. Qualified charitable organizations, such as charitable foundations or public charities, must establish and maintain these funds. Contributors receive an income tax deduction for their charitable donations.
Key Considerations of Charitable Giving in Texas
Here are some key considerations for individuals who want to incorporate charitable giving in their estate plans.
- Choose your charitable beneficiaries: The first step in incorporating charitable giving in an estate plan is to decide which charities or causes to support. This may be a cause that has personal meaning to the individual, or it may be an organization with a proven track record of success in addressing a particular issue.
- Consider tax implications: Charitable giving in estate planning can also have tax benefits. Individuals may be able to reduce their estate tax liability by making charitable donations, as these gifts are typically deductible from the gross estate. In addition, certain types of charitable gifts may also provide income tax benefits. For example, donations to a charitable remainder trust may be eligible for a charitable income tax deduction, while contributions to a donor-advised fund may be eligible for a current income tax deduction.
- Seek professional advice: Incorporating charitable giving in an estate plan can be complex, so it is important to seek professional advice from an attorney or financial planner. These professionals can help individuals navigate the various options available and ensure that their estate plan reflects their wishes. In addition, individuals should also consult with their chosen charities to ensure that their gifts will be used in a way that aligns with their philanthropic goals.
Tax Benefits of Charitable Giving in Texas
In Texas, charitable giving can have several tax benefits when included in estate plans. Here are some of the tax benefits of charitable giving in Texas estate plans:
- Estate tax deduction: Charitable gifts made through a will or trust can be deducted from the value of the estate for estate tax purposes, reducing the overall estate tax liability. Texas does not have a state-level estate tax, but federal estate tax applies to estates valued over $11.7 million (as of 2021), so charitable giving can be a useful tool for reducing or eliminating estate tax liability.
- Income tax deduction: Charitable gifts made during the donor’s lifetime can also provide income tax deductions, which can reduce the donor’s taxable income. Texas does not have a state-level income tax, but taxpayers may still be able to take advantage of federal income tax deductions.
- Capital gains tax avoidance: Donating appreciated assets, such as stocks or real estate, can help donors avoid capital gains tax on the appreciation. This can be especially beneficial for assets significantly appreciated in value since they were acquired.
Other Related Posts
- The Pros and Cons of Using Joint Tenancy as an Estate Planning Strategy in Texas
- How To Minimize Estate Taxes in Texas
- The Importance of Updating Your Estate Plan Regularly in Texas
- How to avoid probate in Texas: Basic strategies for estate planning
- How to Protect Your Assets and Your Loved Ones with Estate Planning in Texas
- 5 Common Misconceptions About Texas Probate and Estate Planning
- Evaluating your situation relating to your estate plan
- Who are the heirs to an estate when someone dies without a will?
- What are trusts, and why are they important in estate planning?
- What will it cost me if I delay getting my estate planning done… or just don’t do it all?
- The Importance of Updating Your Estate Plan in Texas: When and Why You Should Do It
FAQs
Bryan Fagan, a native of Atascocita, Texas, is a dedicated family law attorney inspired by John Grisham’s “The Pelican Brief.” He is the first lawyer in his family, which includes two adopted brothers. Bryan’s commitment to family is personal and professional; he cared for his grandmother with Alzheimer’s while completing his degree and attended the South Texas College of Law at night.
Married with three children, Bryan’s personal experiences enrich his understanding of family dynamics, which is central to his legal practice. He specializes in family law, offering innovative and efficient legal services. A certified member of the College of the State Bar of Texas, Bryan is part of an elite group of legal professionals committed to ongoing education and high-level expertise.
His legal practice covers divorce, custody disputes, property disputes, adoption, paternity, and mediation. Bryan is also experienced in drafting marital property agreements. He leads a team dedicated to complex family law cases and protecting families from false CPS allegations.
Based in Houston, Bryan is active in the Houston Family Law Sector of the Houston Bar Association and various family law groups in Texas. His deep understanding of family values and his professional dedication make him a compassionate advocate for families navigating Texas family law.
