Kirk Douglas passed away on February 5, 2020, at the age of 103. He was a silver-screen icon who had also been known for his charity. He and his wife created the Douglas Foundation in 1964. This Foundation benefitted many nonprofits, including:
- the Children's Hospital of Los Angeles
- the Kirk and Anne Douglas Childhood Center; and
- a St. Lawrence University scholarship for underprivileged students.
Upon his death, it has been revealed that most of his approximately $80 million estate was left to the Douglas Foundation. Many people – whether you have a multi-million dollar estate or not – often choose to leave their hard-earned money to charity. The primary reasons people give to charity at death are: (1) wanting to do good for their fellow man; (2) tax savings; and (3) leaving a legacy. But mistakes are often made in charitable giving. In this article, we discuss three of the most common mistakes.
Mistake No. 1: Improper Documentation
For some, a hand-written will or an online will suffices the estate planning laws in Tennessee. Though not always the best option, these types of wills can survive. That's not true for other estate planning tools, especially when it comes to charitable planning.
Charitable contributions require specific legal-binding documentation, most of the time outside of a will, in order to satisfy requirements for tax-related deductions. Without specific authorization from your estate documents, an executor or trustee may not be permitted to make the charitable contribution. Without this contribution, the tax benefits that your heirs could have obtained will not occur.
This mistake is a very basic one in Tennessee that takes place more often than you may think. Estate documents can be complex, depending on many factors, and without the experience and insight of a trained estate planning attorney, things can go unnoticed.
Mistake No. 2: Failure to Use the Right Gift-Giving Tool Aligned with Your Interests
There are many ways to leave gifts to charities or nonprofits after you have died. In most circumstances, if you want to take advantage of estate planning tools, then you don't want to give an outright gift to a charity, e.g., cash. You want to give in a strategic way that benefits the charity, your wishes, and your estate. In Tennessee, some of the options you have are:
- charitable remainder trust
- charitable lead trust
- assignment of trust income
- gifts from principal of a trust
- life income, fixed amount
- life income, variable amount
- pooled income fund.
There are also special situations you need to consider. For example, you may want to transfer assets of a private foundation or liquidate a limited liability company to benefit a charity upon your death. These things, including the above-listed options, can all benefit your estate as well as charities, but they are all done for different reasons aside from the desire to give. Not all options will be aligned with your intentions. In fact, without speaking to an attorney first, you may not even know about all of your options and may choose one that doesn't best accommodate your needs or wants.
Mistake No. 3: Failure to Consider the Estate Tax
Tennessee does not have an inheritance tax, but if you have an individual estate exceeding a value of $11.58 million in 2020, then a federal estate tax return is required. For almost all of us, this is not a concern. However, if this is the case, then you want to pay special attention to how you give gifts via your estate plan. Giving by way of an IRA versus an after-tax savings account can produce different results.
For example, a person may have $5 million in an IRA and $5 million in an after-tax savings account. All of the funds apart from $2.5 million is to go to his grandchildren in equal parts. The $2.5 million exception will go to a charity. If the money for the charity comes from the IRA the grandchildren will receive more since the bulk of their assets will be received after taxes. The IRA funds will be taxed, but the charity will still receive its $2.5 million while the grandchildren – depending on their ages – will have at least 10 years to withdraw funds from the IRA and benefit from tax-savings. If, on the other hand, the charitable gift comes from the savings account, the grandchildren lose their tax-saving benefits while the charity receives no additional benefit.
The Key Takeaway
Charitable giving as part of your estate plan is a great way to do good in society, leave a legacy, and still give to your loved ones, too. But making sure it's done right is key to its success.
If you are thinking about charitable planning as part of your Tennessee estate plan, contact an estate planning attorney who has the experience and insight to get the planning and documentation done right.