§ 1.6 Estate Planning

Charitable Giving in a Texas Estate Plan

Most charitable giving in estate plans is done for its own sake rather than for tax reasons. That is worth saying first, because the structures below are frequently presented as though the tax treatment were the point.

Since the standard deduction rose sharply in 2018, the large majority of American households no longer itemise, which means their lifetime charitable gifts produce no federal income tax benefit at all. They give anyway. The structures described here are not a way of making generosity profitable; they are ways of making a gift larger, more durable or better timed than writing a cheque would allow.

The bequest

The simplest approach is a clause in the will. It can be a fixed sum, a percentage of the residue, a named asset, or a contingent gift that takes effect only if other beneficiaries do not survive. Percentages tend to work better than fixed amounts over long periods, because an estate's value moves and a $50,000 bequest written in 1998 may represent a very different share of the whole today.

Two drafting points repay attention. Identify the organisation precisely — legal name, city and, ideally, employer identification number, since charities merge, rename and dissolve. And say what happens if the named charity no longer exists: naming a successor, or authorising the executor to select a similar organisation, avoids a cy pres proceeding.

Charities can also be named directly as beneficiaries of retirement accounts, and this is frequently the most efficient charitable gift available. A tax-exempt organisation pays no income tax on the distribution, whereas an individual beneficiary now faces the ten-year compression described on the IRA inheritance trust page. Leaving the IRA to charity and other assets to family is often strictly better for everyone than the reverse.

Charitable remainder trusts

A charitable remainder trust pays an income stream to the donor, or to people the donor names, for a term of years or for life, after which the remainder passes to charity. Contributing appreciated property to such a trust allows it to be sold without immediate capital gains tax to the donor, so the full value can be reinvested to generate the income stream, and a partial charitable deduction is available in the year of the gift.

The unitrust version pays a fixed percentage of the trust's value revalued annually — the payment moves with the portfolio. The annuity trust version pays a fixed dollar amount set at the outset. Both are irrevocable, both require administration and tax filings, and both are best suited to substantial gifts of highly appreciated, low-yielding assets. They are not economical at small scale.

Charitable lead trusts

A lead trust reverses the order: the charity receives the income stream first, for a set term, and the remainder returns to the donor's family. Because the family's remainder interest is valued at the outset and discounted for the intervening charitable payments, a lead trust can transfer appreciation to the next generation at a reduced transfer tax cost. The technique becomes more attractive as interest rates fall and less attractive as they rise, and the arithmetic should be run for the actual rate environment rather than assumed.

Donor-advised funds

A donor-advised fund is an account at a sponsoring public charity — a community foundation, or the charitable arm of a brokerage — into which the donor makes an irrevocable gift and from which they subsequently recommend grants. The deduction, if the donor itemises, arrives in the year of the contribution; the grants can be spread over years.

The main uses are timing and simplification. A household with an unusually high-income year can concentrate several years of giving into it. A donor holding appreciated stock can contribute it directly and avoid the gain. And a fund can be named as a beneficiary of an estate or an IRA, with successor advisers appointed so that the family's giving continues.

Two honest caveats. The recommendation is legally advisory, not binding; the sponsoring charity holds the assets. And a donor-advised fund is not a private foundation — it involves far less administration and far less control, which for most families is a feature rather than a limitation.

Qualified charitable distributions

For donors past a specified age, a qualified charitable distribution allows a transfer directly from an IRA to a qualifying charity, up to an annual limit, excluded from gross income altogether. Because it is an exclusion rather than a deduction, it works for the large majority of givers who take the standard deduction, and it can satisfy a required minimum distribution.

The mechanics matter: the transfer must go directly from the custodian to the charity, and a distribution taken personally and then donated does not qualify. Donor-advised funds are excluded from this treatment. The IRA distribution guidance published by the IRS sets out the current age threshold and annual cap, both of which are now indexed and both of which have changed recently.

Fitting it into the rest of the plan

Charitable structures sit on top of a working plan; they do not substitute for one. A donor who has funded a remainder trust but has no durable power of attorney has solved the smaller problem. Where long-term care is a realistic prospect, charitable transfers also interact with benefits eligibility — a gift is a gift for look-back purposes regardless of the recipient's tax status, as the eligibility page explains. Before any irrevocable charitable transfer, that interaction is worth checking with a lawyer who can see the whole picture.