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Charitable Giving in Your Texas Estate Plan: Options and Tax Benefits

Charitable giving in estate plans is a way for individuals to leave a lasting legacy and make a meaningful impact in the world. By including charitable donations in their estate plans, individuals can ensure that their assets are distributed according to their wishes and that their philanthropic values are carried on beyond their lifetime. Like in most states, charitable giving can be a valuable component of estate planning in Texas. While having a lawyer involved in charitable giving is not always required, consulting with an attorney when incorporating charitable giving in an estate plan is highly recommended.

A lawyer can help ensure the estate plan is legally valid and properly executed. Charitable giving in estate planning often involves complex legal and tax issues. A lawyer can help navigate these complexities to ensure that the charitable gifts are structured in the most effective way possible. Various charitable giving vehicles are available, including donor-advised funds, charitable remainder trusts, and private foundations, and a lawyer can help identify which option is best suited for the donor's needs. Here at the Law Office of Bryan Fagan, our qualified attorneys understand the need for precision in charitable giving cases and are well-known for handling such cases exceptionally.

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.

There are different types of bequests that can be included in a will or living trust, including:

  • Specific bequest: This is a bequest of a specific amount of money or a particular asset, such as a piece of property, to a charitable organization.

  • Residuary bequest: This is a bequest of all or a portion of the remaining assets of an estate after all other bequests have been made. For example, a person might leave a percentage of their estate to a charitable organization after specific gifts have been made to family members or friends.

  • Contingent bequest: This is a bequest that takes effect only if certain conditions are met, such as if the primary beneficiaries predecease the testator.

Bequests can be an effective way to support a charitable organization that aligns with a person's values and beliefs. It's important to consult with a qualified estate planning attorney to ensure that your bequest is properly drafted and will be carried out according to your wishes.

  1. Charitable Gift Annuities

A charitable gift annuity is a type of charitable giving strategy that can be included in a Texas estate plan. 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 income payments can begin immediately or be deferred to a future date.

The amount of the income payment is determined by several factors, including the donor's age at the time of the gift, the amount of the gift, and the annuity rate offered by the insurance company. Generally, the older the donor, the higher the annuity rate, and the higher the income payment. At the end of the donor's life, the remaining assets in the annuity are transferred to the charitable organization to support its mission. The donor receives an immediate tax deduction for a portion of the gift, based on the donor's age and the prevailing interest rates at the time of the gift.

  1. Charitable Lead Trusts

A charitable lead trust (CLT) is a type of trust that can be used in charitable giving strategies in Texas. With a CLT, the trust pays a fixed or variable income to one or more charitable organizations for a specified period of time. At the end of the trust term, the remaining trust assets are distributed to non-charitable beneficiaries, such as family members or other heirs. There are two types of CLTs: a charitable lead annuity trust (CLAT) and a charitable lead unitrust (CLUT).

In a CLAT, the trust pays a fixed amount to the charitable organization(s) each year for a specified period of time, and at the end of the term, the remaining assets are distributed to the non-charitable beneficiaries. In a CLUT, the trust pays a fixed percentage of the trust assets to the charitable organization(s) each year for a specified period of time, and at the end of the term, the remaining assets are distributed to the non-charitable beneficiaries.

  1. Charitable Remainder Trusts

A charitable remainder trust (CRT) is a type of charitable giving strategy that can be included in a Texas estate plan. A CRT is an irrevocable trust that provides income to a designated beneficiary for a certain period of time, and after that period ends, the remaining assets in the trust are transferred to a designated charitable organization.

There are two types of CRTs: charitable remainder annuity trusts (CRATs) and charitable remainder unitrusts (CRUTs). In a CRAT, the income paid to the beneficiary is a fixed amount, determined at the time the trust is established. The income is paid annually, and the amount does not change, regardless of the performance of the trust assets. In a CRUT, the income paid to the beneficiary is a fixed percentage of the trust assets, determined at the time the trust is established. The income is paid annually, and the amount fluctuates with the performance of the trust assets.

  1. Pooled Income Funds

A pooled income fund is a type of charitable giving vehicle that allows multiple donors to contribute assets to a single fund, which is managed by a charitable organization. The income generated from the pooled assets is then distributed among the donors and a designated charity or charities, according to each donor's percentage interest in the fund. In Texas, a pooled income fund must be established and maintained by a qualified charitable organization, such as a charitable foundation or a public charity. The donors who contribute to the fund receive an income tax deduction for their contributions, which are considered 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.

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FAQs

How do I choose a charitable organization to include in my Texas estate plan?
When choosing a charitable organization to include in your Texas estate plan, it is important to research the organization thoroughly and ensure that it aligns with your values and goals. You may also want to consider factors such as the organization's financial stability and reputation.
Can I modify or revoke a charitable giving provision in my Texas estate plan?
Yes, you can modify or revoke a charitable giving provision in your Texas estate plan at any time, provided that you have the legal capacity to do so. You should consult with an estate planning attorney to determine the best way to modify or revoke your charitable giving provision, as the process can be complex and may have tax implications.
Why do people give to charity?
People give to charity for a variety of reasons, including a desire to help those in need, to support a specific cause or organization, to give back to their community, to gain tax benefits, or to feel a sense of personal satisfaction or fulfillment.
How can I make sure that my charitable donation is being used effectively?
To ensure that your charitable donation is being used effectively, you can research the charity's financial transparency and accountability, and look for evidence of the impact of their programs and services. You can also consider donating to organizations that have been independently evaluated or certified by third-party organizations.
Can I donate real estate as part of my charitable giving plan in Texas?
Yes, you can donate real estate as part of your charitable giving plan in Texas. However, it's important to consult with an attorney or financial advisor to determine the best way to do so.
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