Create A Legacy Through Charitable Giving

By Tom McLean. 03/05/2021

We make charitable gifts to improve the lives of individuals, our communities, and the world. Whether it is to help preserve valuable habitats, create educational opportunities, feed hungry people, help eliminate disease, or build a source of healthy, drinkable water, gifts of your financial resources make an almost incalculable difference in the lives of others. Interestingly though, charitable giving also makes a positive impact on you, the giver. Studies show that giving makes you happier. Research by Thomas J. Stanley showed that those that donate 10% or more of their income, build more wealth, and are happier than those that do not give.

How To Leave A Legacy

Research shows that while most Americans make charitable gifts each year, only about 6% actually include charitable gifts in their estate plans. A sound estate plan nearly always includes a will. Creating a will can be a critical step in the estate design process. This is often the time where you consider your life in full. What kind of enduring legacy and statement you wish to leave? What values do you wish to pass on to future generations? Who has been important in your life and who could benefit from your financial legacy? Detailed discussions with your financial planner and attorney can help you determine which assets are best to leave to your heirs and which assets are best to gift to your favorite charitable organizations. These planning discussions can also provide direction on other elements needed to complete your estate plan.

When we think of an estate plan, we might just think of our will. However, wills are often not the determining document for who will receive our retirement assets. This is because retirement assets have named beneficiaries (wills usually do not determine who receives retirement assets). 

Who are the named beneficiaries of your retirement accounts? Chances are for most of you, it’s your children. For those without children it is often siblings or nieces and nephews. And while there is no estate tax on most estates under $2,193,000 in Washington state (and no estate tax for estates under $11,700,000 at the federal level), your heirs may still pay a bundle in income taxes upon receiving your retirement accounts. Why? Because withdrawals from retirement accounts (traditional, as opposed to tax-free Roth IRAs), are taxed at ordinary income tax rates. Additionally, many non-spousal beneficiaries that receive inheritances from individuals that pass after 2019 are required to liquidate their inherited IRAs within 10 years! That compressed distribution requirement can push your heirs into even higher tax brackets.

Let’s consider an estate with two gifts: a $1,000,000 IRA and a $1,000,000 house. If your children are married and have jobs with higher incomes ($330,000, in this example), annual withdrawals of $100,000 will likely be taxed at 32% (or more if they are subject to state income taxes)! That means the $1,000,000 inheritance could be slashed by a third or more. On the other hand, if you designate your favorite charitable organizations as beneficiaries of your retirement accounts and give your children the $1,000,000 home, the charities will not pay any income tax on the gift and your children would receive the home tax free! The table below helps illustrate my point:

Gift to children Gift to charity
Scenario 1
1,000,000 Traditional IRA
1,000,000 Home
Assumed tax rate = 32%
$0 (charity does not pay tax)
Amount actually received
Scenario 2
1,000,000 Home
1,000,000 Traditional IRA
Assumed tax rate = 32%
$0 (home received tax-free)
$0 (charity does not pay tax)
Amount actually received

While this example simplifies and condenses the details, the fact remains that making charitable organizations the beneficiaries of your retirement accounts is an important strategy to consider.

Other Financial Tools To Create Your Legacy

Charitable Remainder Trust (CRT)

CRTs have the advantage of providing a significant tax deduction opportunity in the year it is established. Additionally, this is a vehicle that provides an income to someone (yourself or other person(s) of your choosing) during their lifetime and provides a charitable organization with the remainder at the time of the income beneficiary’s passing.

Charitable Gift Annuity

With this tool, you make a gift to the charitable organization in return for lifetime of income payments. This is great if you want to make a significant gift, but also need income during your lifetime. Additionally, while supporting a favorite organization, this provides you with a tax deduction in the year you make the gift.

Donor Advised Funds (DAF)

DAFs are an excellent way to consolidate many future years of gifting, get a potentially much larger deduction, and support any number or organizations. Gifts made to a DAF fund are held and invested. As an investment account, it can grow over time. And as desired, the owner of the account requests gifts to be made to the charities they want to support.

With the passage of the Tax Cuts and Jobs Act in 2017, many people have found they are no longer able to itemize their taxes. One consequence of higher standard deductions is that the charitable gifts may no longer be deductible if the total amount is below the standard deduction amount. One of the outstanding features of Donor Advised Funds (DAF) is that you can identify many years of future gifting and donate that total amount to your DAF in the current year and get a deduction for those many future years of gifts (up to 30% of adjusted gross income). Remember, you take the deduction in the year the contribution is made to the DAF, not when the grant is made in the future to your specified charity.

Appreciated Stock

Gifting shares of appreciated stock can be an excellent way to make a transformational difference to a charitable organization and the people it serves. For those fortunate enough to have investments with substantial growth, selling these investments often represents a large tax burden. Too often, donors sell appreciated stock and gift the cash. This is a big mistake. When you sell highly appreciated investments, you owe tax on the gains. While you may get a deduction, the taxes you will owe can wipe out any and all benefit the deduction provides. 

A better strategy is to gift the stock directly to the charity. This allows you to get an immediate deduction without having to pay any capital gains tax! Note too, that appreciated stock can be gifted to a Donor Advised Fund. This would allow you a potentially consolidate gifting over many years to create a larger deduction and avoid paying any capital gains tax.

Do Not Wait Until It's Too Late

Those that do not plan, have no plan. This may seem self-evident; however, many people delay putting an estate plan together and many do not consider the legacy they wish to leave. Thinking about our demise can be uncomfortable, unpleasant, and often avoided. However, death is a certainty for all of us and making plans for it can ensure that your values, your legacy, your heart endures – especially through the charitable missions we support.

Tom McLean is a guest-contributor to Friendly Water for the World, CERTIFIED FINANCIAL PLANNER™ professional and founder of Advitica Financial Planning. He can be reached at

Tom McLean

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