By Brad Zuke, Partner at May Herr & Grosh, LLP AKA: The World Bicycle Relief Guy
As you’re interested in donating to charitable organizations I’d like to offer some information about incorporating those donations into your estate planning documents.
Wills:
Charitable bequests written into your Will are exempt from Pennsylvania inheritance tax. Sometimes people leave their assets to family members with direction to make donations to charities. Doing that causes the estate to pay inheritance tax first, and then there’s less available for the donations. Charitable bequests can be stated specifically or can be a portion of your residuary estate.
Example 1: I leave $1,000 to this specific organization, and the remainder in equal shares to my children. In this example, it’s important to make sure that a specific dollar amount is available to distribute before the rest is given to your children. If your estate is smaller than you’ve anticipated there may not be funds left for your children once the specific bequest is distributed.
Example 2: I give 10% to this specific organization, and the remainder in equal shares to my children. In this example, the charitable bequest is a percentage of whatever is in your residuary estate. While the resulting donation amount won’t be determined until the estate is administered, this assures there will be some funds for all your named beneficiaries.
IRAs:
There’s another donation strategy I want you to know about, and this applies during your lifetime. Suppose you’re of an age where you’re required to take annual minimum distributions from a traditional IRA. In that case, you can designate those RMDs to be paid directly to a tax-exempt organization. This avoids the RMD funds being taxable income to you and the full amount of the RMD can go to the organization of your choice.
Example: If you have a required minimum distribution of $1,000 this year and you’re in a 20% income tax bracket, you’ll receive the $1,000 and then pay federal income tax of $200, leaving you with $800 to donate to your organization of choice. Alternatively, if you direct your RMD to be paid directly, the organization will receive the full $1,000, and that amount is not included in your taxable income.
It can be complicated. I encourage you to ask your tax or estate planning advisors about these ideas if you’re interested in assisting the non-profit organizations of your choice to do even more of their good work.
