One way to maximize the amounts left to heirs and to charity is to use a retirement account for charitable gifting. This is because retirement accounts have income that would be taxable upon distributions to heirs. If a retirement account is donated to charity, the charity does not pay income tax on the account because it is a tax-exempt organization. This would create a deduction against estate taxes and prevent the imposition of income taxes for heirs. It could also allow for other assets without income taxes to be left to heirs. Understand that this is a general example and one should first consult with an estate planning professional before making any such bequests or designations.
It is important to ensure the organization qualifies as a charitable organization and that the donation is sufficiently documented to take a charitable deduction. The Estate will need to submit evidence to establish its right to the deduction. Additionally, the IRS has provided some flexibility for making charitable bequests by allowing deductions for contributions to a donor advised fund (the “DAF”). However, there are a few rules and restrictions that should be reviewed and evaluated for this type of a bequest to be eligible for a deduction.
Subject to applicable limitations, the amount of a charitable deduction is generally the fair market value of the transferred property that is included the gross estate of the deceased donor. If property is transferred to charity that is not included in one’s gross estate, the value of the donation is generally not includable in the amount of the charitable deduction. Another benefit of a bequest to charity is the deduction is not subject to the percentage limitations that are applicable to charitable deductions for gifts made during life. For example, a decedent can give 100% of his or her assets to charity and receive the full deduction, whereas charitable deductions for gifts are generally limited to 50% (or higher for cash gifts and lower for other types of gifts) of the taxpayer’s adjusted gross income for the year of the donation.