What Is a Legacy Donation and How Does It Work?

A legacy donation, also known as planned giving, involves a charitable contribution arranged during a donor’s lifetime but typically realized after their passing. It represents a way to support causes that align with a donor’s values, ensuring their philanthropic impact continues into the future. These gifts are often integrated into an individual’s estate plan, allowing for strategic financial benefits while providing lasting support to chosen beneficiaries. This approach ensures that charitable objectives are met through a structured and often tax-efficient process.

Forms of Legacy Donations

Legacy donations encompass various structured methods, each designed to facilitate a donor’s long-term philanthropic goals. These mechanisms offer flexibility in how assets are transferred and can provide distinct financial considerations for the donor.

Bequests in a Will or Trust

One common form of legacy giving is a bequest made through a will or living trust. A donor can specify a gift of a dollar amount, a percentage of their estate, or specific non-monetary assets like property or securities. Bequests can also be residual, meaning the charity receives what remains of the estate after all other specific bequests and expenses have been settled. These gifts are generally deductible from the estate for federal estate tax purposes, potentially reducing the overall estate tax burden.

Beneficiary Designations

Naming a charity as a beneficiary on financial accounts offers a straightforward way to make a legacy gift, bypassing the probate process. This applies to retirement accounts, such as IRAs and 401(k)s, and life insurance policies. Donors can designate a charity to receive all or a percentage of the account’s value directly upon their death. This method can be advantageous for highly appreciated assets like retirement accounts, as it can help avoid income taxes that heirs might otherwise incur.

Charitable Remainder Trusts (CRTs)

A Charitable Remainder Trust (CRT) is an irrevocable trust where a donor transfers assets to the trust. The trust then pays income to the donor or other non-charitable beneficiaries for a specified period, such as a set number of years or their lifetime. The remaining assets are then distributed to one or more designated charities. CRTs can be structured as an annuity trust (CRAT), paying a fixed dollar amount annually, or a unitrust (CRUT), paying a fixed percentage of the trust’s value, revalued annually. Donors may receive an immediate partial income tax deduction and can avoid capital gains taxes when funding the trust with appreciated assets.

Charitable Lead Trusts (CLTs)

A Charitable Lead Trust (CLT) is an irrevocable trust designed to provide an income stream to a named charity for a specified term. After this period, the remaining assets are transferred to non-charitable beneficiaries, often family members. CLTs are used for estate and gift tax planning, as they can reduce the taxable value of assets passed to heirs. The donor may be eligible for an immediate income tax deduction, depending on how the trust is structured.

Charitable Gift Annuities

A charitable gift annuity involves a contract between a donor and a charity. The donor makes an irrevocable gift of assets, such as cash or appreciated securities, to the charity. In return, the charity provides fixed, regular payments to the donor, and potentially another beneficiary, for their lifetime. The remaining funds then go to the charity. Donors may receive an immediate partial income tax deduction and can minimize capital gains taxes if appreciated assets are used to fund the annuity.

Real Estate or Other Assets

Donating real estate or other valuable assets like appreciated securities or personal property directly to a charity is another form of legacy giving. This can include residential or commercial properties, or vacant land. Gifting appreciated property held for more than one year can offer significant tax benefits, including avoidance of capital gains tax on the appreciation and a charitable income tax deduction based on the fair market value of the property.

Planning a Legacy Donation

Planning is a crucial step in establishing a legacy donation, integrating an individual’s philanthropic desires with their financial and estate objectives. This phase involves several considerations and decisions.

Developing Charitable Goals

Donors reflect on the causes and organizations that resonate most deeply with their values. This involves identifying specific areas of impact, such as supporting education or environmental conservation. These intentions help guide the selection of beneficiary organizations and the gift’s structure.

Assessing Financial Situation

An assessment of one’s financial situation and assets is necessary. This includes reviewing assets like cash, investments, real estate, and retirement funds, to determine what can be allocated for a charitable gift. Understanding these assets helps in deciding suitable and tax-efficient giving vehicles.

Consulting Professionals

Consulting with qualified professionals provides guidance. Financial advisors help evaluate assets and integrate charitable giving into a financial plan. Estate planning attorneys offer insights into legal structures like wills and trusts. Tax professionals explain potential income, gift, and estate tax implications, helping to maximize benefits.

Choosing Beneficiary Organizations

Choosing beneficiary organizations involves diligent research to ensure they are reputable and align with the donor’s goals. Donors can investigate a charity’s mission, financial health, and demonstrated impact. This due diligence helps confirm the gift will be used effectively.

Determining Gift Timing and Structure

Determining the timing and structure of the gift is important. This involves deciding whether the gift will be an outright contribution or a deferred one, taking effect after the donor’s lifetime. Different assets may be better suited for specific legacy giving forms.

Executing a Legacy Donation

Once planning for a legacy donation is complete, the next phase involves formalizing the gift. This entails specific steps to make the chosen philanthropic arrangement legally binding and effective. The execution process translates the donor’s intentions into formal documentation.

Updating Estate Documents

Updating existing estate documents or drafting new ones is a primary step for many legacy gifts. Donors work with an estate planning attorney to incorporate charitable bequests into their will or living trust. This may involve adding a codicil to an existing will or creating a new document that clearly specifies the charitable beneficiary, gift type, and any conditions. Proper execution, including signatures and witnessing, ensures validity.

Beneficiary Designations

For gifts made through beneficiary designations, donors contact their financial institutions or insurance providers directly. This involves completing specific beneficiary designation forms for accounts such as IRAs, 401(k)s, or life insurance policies. Submitting updated forms to the administrator records the charity as a designated recipient, ensuring the designation is correct.

Establishing Trusts or Annuities

Establishing charitable trusts or annuities requires working with a qualified institution or the chosen charity itself. For Charitable Remainder or Lead Trusts, this involves drafting a trust deed or agreement with legal counsel, naming a trustee, and formally transferring assets into the trust. For charitable gift annuities, a contractual agreement is established with the charity outlining the gift and fixed payments to be received. These instruments necessitate careful legal and financial coordination.

Notifying the Beneficiary Organization

Notifying the beneficiary organization about the planned gift is an optional, but often encouraged, step. While not legally required for the gift’s validity, informing the charity allows them to acknowledge the donor’s generosity and plan for the future use of the funds. This communication can also ensure the charity has accurate information for when the gift is eventually realized, facilitating a smoother transition of assets.