Charitable giving is a powerful tool for high-net-worth individuals looking to reduce estate taxes while creating a lasting legacy.
With strategic planning, philanthropy can accomplish dual goals: helping the causes you care about and significantly mitigating your estate tax burden.
Let’s explore the mechanics of estate taxes, key charitable giving strategies, and practical tips to maximize the benefits of philanthropic contributions.
What are estate taxes, and why do they matter?
Estate taxes, often called the “death tax,” apply to the wealth transferred upon a person’s death. At the federal level, the federal estate tax exemption for 2024 is $13.61 million per individual, meaning any estate value above that amount is subject to taxation at rates as high as 40%. The combined exemption can be as high as $27.22 million for married couples.
Many states impose additional estate or inheritance taxes with much lower exemption limits. Even those with modest estates may face state-level taxes, creating a significant financial burden for heirs.
Charitable giving offers a solution. Donations to qualified nonprofit organizations are exempt from estate taxes, allowing you to reduce your taxable estate while supporting meaningful causes.
With proper planning, philanthropy can help you preserve wealth, minimize tax liability, and leave a legacy of generosity.
How charitable giving reduces estate taxes
When you donate to a qualified charity—during your lifetime or as part of your estate plan—the value of those gifts is excluded from your taxable estate. These donations reduce overall estate tax liability, often significantly. Below are three key strategies to incorporate charitable giving into your estate plan.
Charitable bequests in your will: Including a charitable bequest in your will is one of the simplest ways to reduce estate taxes. A charitable bequest allows you to specify a particular dollar amount, a percentage of your estate, or specific assets (such as real estate or stocks) to donate to a charity.
Consider an estate valued at $16 million. If you leave $2 million to a qualified charity through a bequest, the taxable estate is reduced to $14 million. With the federal estate tax exemption at $13.61 million in 2024, only $390,000 of the estate is taxable, saving heirs a significant amount in federal taxes.
Notably, there is no limit on the charitable deduction for bequests, making this an ideal option for those with substantial estates.
Charitable remainder trusts (CRTs): A charitable remainder trust is a tax-advantaged vehicle that allows you to transfer assets to a trust to benefit a charity while retaining income during your lifetime.
Here’s how it works:
- You transfer assets like appreciated stocks or real estate to the CRT.
- The CRT pays you (or a designated beneficiary) an income stream for life or a set term of years.
- Upon your passing, the remaining assets in the trust go to the designated charity.
A CRT’s benefits include removing assets from your taxable estate, deferring capital gains taxes when appreciated assets are sold, and qualifying for an immediate income tax deduction based on the present value of the assets that will eventually pass to the charity.
CRTs are particularly useful for those with highly-appreciated assets because they provide a way to unlock the value of those assets while minimizing taxes and supporting charitable goals.
Donor-advised funds (DAFs): A donor-advised fund is a flexible and efficient vehicle for charitable giving. When you contribute to a DAF, you receive an immediate tax deduction, and your funds grow tax-free. You can then recommend charity grants over time, via estate documents or even in your will.
DAFs often involve family members in philanthropy, allowing heirs to participate in deciding how charitable funds are distributed.
DAFs simplify the administrative burden of managing charitable donations, making them an attractive alternative to private foundations.
Contributions to a DAF during your lifetime or through your estate are deducted from your taxable estate, reducing estate taxes.
Advanced charitable giving techniques
Additional charitable giving strategies can enhance tax efficiency for those with large estates.
Private foundations: Creating a private foundation can provide even greater control over your charitable giving. While setting up a foundation requires significant time and resources, it allows you to direct how funds are used, support multiple causes, and involve future generations in philanthropy. Contributions to the foundation are deductible for estate tax purposes, and the foundation benefits from tax-exempt status.
Gifts of appreciated securities: Donating appreciated stocks, bonds, or mutual funds offers a double tax benefit. You avoid paying capital gains taxes on the appreciation and the total market value of the securities is deductible for estate tax purposes.
This strategy can be used with charitable bequests, CRTs, or DAFs to maximize tax efficiency.
Qualified charitable distributions (QCDs): If you are 70½ years old or older, you can make qualified charitable distributions directly from your IRA to qualifying charities, up to $100,000 per year, without having to pay income tax on the distribution.
While this is primarily an income tax strategy, QCDs can also reduce the size of your taxable estate since the IRA balance decreases with each distribution.
How to maximize the impact of your giving
To ensure your charitable giving strategy is both practical and aligned with your goals, consider the following steps:
Engage professional advisors: Estate planning attorneys, tax professionals, and financial advisors—particularly those with a CPA license—can help you navigate the complexities of charitable giving and develop a plan that meets your specific needs.
Be strategic with asset selection: Certain assets, such as appreciated securities or retirement accounts, offer unique tax benefits when donated. Choose assets carefully to maximize the impact of your gifts.
Document your wishes: Clearly outline your charitable intentions in your estate planning documents to ensure they are carried out as you envision.
Involve your family: Incorporate your family into your philanthropic goals, particularly if using tools like DAFs or private foundations. This ensures your legacy is carried forward in alignment with your values.
Final thoughts
Charitable giving is a powerful strategy for reducing estate taxes while making a meaningful impact on the world. Whether through charitable bequests, trusts, or donor-advised funds, incorporating philanthropy into your estate plan allows you to align your financial goals with your values.
To make the most of these strategies, consult experienced professionals who can help you develop a customized plan. With careful planning, you can minimize your tax burden, preserve wealth for your heirs, and leave a legacy that reflects your passions and priorities.
Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual. All investing involves risk, including loss of principal. No strategy ensures success or protects against loss.