What Is Legacy Giving? Types, Steps, and Tax Benefits

Legacy giving allows individuals to support cherished causes beyond their immediate lifetime. These planned gifts are arranged through various estate planning mechanisms, ensuring a sustained impact on organizations and missions donors value. This method enables significant contributions that might not be practical during one’s working years, perpetuating values and generosity for future generations. It provides a structured way to leave a lasting mark, supporting the long-term sustainability of non-profit endeavors.

Defining Legacy Giving

Legacy giving is a commitment to philanthropy that extends beyond one’s immediate life, allowing individuals to support charitable organizations and causes long into the future. Unlike immediate donations, a legacy gift is arranged in the present but realized after the donor’s passing. This approach ensures a donor’s values and charitable intentions continue to make an impact for generations. It involves integrating a charitable donation into one’s comprehensive estate plan.

These planned contributions are facilitated through various financial and legal instruments, such as wills, trusts, or beneficiary designations on assets like retirement accounts or life insurance policies. Individuals can allocate a portion of their estate to non-profit entities, ensuring their support continues indefinitely. The core purpose of legacy giving is to provide future financial stability for charitable missions, allowing organizations to plan for long-term projects and sustain operations. Legacy gifts represent a significant source of future funding for many non-profits, enabling them to pursue their missions with greater certainty and impact.

Common Types of Legacy Gifts

Legacy giving offers diverse pathways for individuals to support chosen causes, structured to align with different financial situations and philanthropic goals. Understanding these mechanisms helps donors make a lasting impact through their estate plans.

Bequests

Bequests are a common form of legacy giving, made through a will or living trust. A donor can designate a specific dollar amount, a percentage of their estate, or particular assets like property or stocks to a charitable organization. Bequests can also be residuary, meaning the charity receives what remains of an estate after all other bequests and expenses are settled.

Charitable Remainder Trusts (CRTs)

Charitable Remainder Trusts (CRTs) allow donors to place assets into a trust, which provides income to the donor or other designated non-charitable beneficiaries for a specified term or their lifetime. Upon the trust’s termination, the remaining assets transfer to the designated charitable organization. CRTs can be structured as an annuity trust paying a fixed amount or a unitrust paying a variable amount based on the trust’s value.

Charitable Lead Trusts (CLTs)

Charitable Lead Trusts (CLTs) provide income payments to a charitable organization for a set period. After this term, the remaining trust assets revert to the donor or their non-charitable beneficiaries. This trust is often favored by individuals who wish to make substantial charitable contributions now, with the intent of transferring assets to heirs later. CLTs can offer significant estate and gift tax benefits.

Gifts of life insurance

Gifts of life insurance provide a simple way to make a future charitable contribution without directly impacting current income or assets. A donor can name a charitable organization as a beneficiary of an existing life insurance policy. Alternatively, an individual might transfer ownership of a paid-up policy to a charity during their lifetime, potentially receiving an immediate income tax deduction.

Gifting retirement assets

Gifting retirement assets, such as Individual Retirement Accounts (IRAs) or 401(k)s, can be a tax-efficient strategy for legacy giving. Donors can name a non-profit organization as a primary or contingent beneficiary of these accounts. Unlike other heirs, charitable organizations are generally exempt from income taxes on inherited retirement assets. This allows the full value to be utilized by the recipient.

Gifts of real estate or other tangible personal property

Gifts of real estate or other tangible personal property, such as art or collectibles, serve as legacy contributions. A donor might gift their home or other real property to a charity while retaining the right to use it for life, known as a retained life estate. Upon the donor’s passing, the property transfers fully to the charity, which can then sell or utilize the asset.

Steps to Establish a Legacy Gift

Establishing a legacy gift involves deliberate steps to ensure a donor’s charitable wishes are fulfilled. The process begins with considering specific charitable organizations or causes an individual wishes to support. Donors should identify groups whose missions align with their values and philanthropic goals. Researching an organization’s financial health and program effectiveness can provide confidence in this selection.

Engaging with qualified financial advisors

Once beneficiaries are identified, engaging with qualified financial advisors, estate planners, and legal professionals is a foundational step. These experts provide guidance on legacy giving options, helping donors understand the implications for their financial and estate plan. Legal counsel ensures all documents comply with applicable laws and precisely reflect the donor’s intentions, preventing future complications.

Reviewing and updating existing estate planning documents

A procedural step involves reviewing and updating existing estate planning documents, such as wills or revocable living trusts. For outright bequests, modifying a will or trust document is necessary to formally name the charitable organization as a beneficiary and specify the gift. These legal documents serve as authoritative instructions for distributing assets from an estate. Regular review ensures they remain current with any changes in a donor’s assets, family situation, or charitable interests.

Designating beneficiaries directly on the account forms

For assets outside of a will or trust, such as retirement accounts or life insurance policies, designating beneficiaries directly on account forms is appropriate. This process is often simpler than amending a will and ensures these assets bypass probate, allowing for a more efficient transfer to the charity. Donors complete a beneficiary designation form provided by the financial institution, naming the non-profit as a primary or contingent beneficiary.

Communicating one’s intentions with the chosen charitable organizations

Communicating one’s intentions with chosen charitable organizations is a beneficial, though optional, step. Informing the charity allows them to acknowledge the donor’s generosity, understand the future gift, and engage in appropriate stewardship. This communication also provides an opportunity for the donor to specify how they would like their gift to be used, such as for a specific program or as an unrestricted donation. Charities value knowing about future gifts as it aids their long-range financial planning.

Tax Implications of Legacy Giving

Legacy giving offers several potential tax advantages that can benefit a donor’s estate and provide current income tax benefits. A significant advantage is the potential for an estate tax deduction. When charitable organizations receive gifts through a will or other estate planning documents, the value of these contributions can be fully deducted from the donor’s gross estate for federal estate tax purposes. This reduces the taxable estate, potentially lowering or eliminating federal estate tax liability for the donor’s heirs.

Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs)

Planned giving vehicles, such as Charitable Remainder Trusts (CRTs), can offer income tax benefits during a donor’s lifetime. While the primary charitable gift is deferred, the donor may receive an immediate income tax deduction for the present value of the future charitable gift when the trust is established. Assets transferred into a CRT are generally removed from the donor’s taxable estate, further reducing potential estate taxes. Charitable Lead Trusts (CLTs) also provide estate and gift tax advantages, as the income stream to charity reduces the value of assets passed to non-charitable beneficiaries.

Appreciated Assets

Gifting appreciated assets, such as stocks or real estate, can be tax-efficient. When these assets are donated directly to a charity, the donor typically avoids paying capital gains tax. The full fair market value of the appreciated asset can often be deducted from the estate, maximizing the charitable impact while bypassing capital gains taxation.

Retirement Assets

Leaving retirement assets directly to charity is a tax-efficient legacy giving strategy. Unlike individual beneficiaries who would generally pay income tax on distributions from inherited tax-deferred retirement accounts, a qualified public charity receives these assets tax-free. This means the entire value of the retirement account can be used for charitable purposes, rather than being diminished by income taxes. Donors should consult IRS Publication 526 for specific guidance on charitable contributions.