Is It Better to Give Now or Later?
Engaging in estate planning can be troublesome. It forces you to face your mortality. Those who are superstitious ascribe all kinds of evil consequences to the contemplation of death while the rest of us are just plain uncomfortable with the finality of it all. But engage in such planning we must if we want to ensure that our estates – our legacies, really – efficiently pass to heirs and other beneficiaries in the manner and amounts we intend.
So, how to handle charitable giving? Is it better to make such gifts now or at death? Charitable bequests are often included in wills to fulfill existing pledges or to round out a lifetime of giving to favorite causes. This approach is especially advantageous when there are no other “noncharitable” heirs involved, or when the estate owner wants to limit the amounts ultimately passing to these heirs. Also, a testamentary transfer may be the only practical way to accomplish giving an entire estate over to charity, particularly if depleting the estate during lifetime effectively impoverishes the estate owner.
But what if there is a choice? What if, during your lifetime, you can give away something, even a significant something, and not dangerously deplete the estate in so doing? Are you better off giving at death or during life?
Obviously, there are pros and cons to each, and everyone’s situation is different. But a general rule to follow is that lifetime charitable gifts are better than the exact same gifts made at death, both for tax and non-tax purposes.
- Charitable gifts made during your lifetime are deductible for Federal income tax purposes. [1] This is the big one. Any gifts you make during your lifetime will save you income tax dollars at the federal level and possibly at the state and local level as well. There are lots of caveats to this, so speak to your tax advisor to get a sense of what the actual benefit may be for you. But as a rough example, consider that a New York City resident taxpayer in the top income tax bracket (and not subject to the alternative minimum tax) would save approximately 43 cents on the dollar in income taxes on a lifetime charitable gift. Not bad — a $50,000 charitable donation would effectively cost only $28,500.
- But charitable bequests reduce your taxable estate, don’t they? Isn’t that effectively an estate tax deduction offering roughly the same benefit? Yes, such bequests do reduce your taxable estate. Continuing the example from the first bullet point, our hypothetical rich NYC taxpayer would save, at the top rate for estate taxes, approximately 57 cents on the dollar. But this savings is very deceiving – had he given away the same money during lifetime his estate would be that much less, and he will have effectively accomplished the same thing – and gotten current income tax deductions during lifetime to boot!
- Charitable gifts made during your lifetime enable you to enjoy seeing the fruits of your giving. It can be as small as knowing that the shelves are stocked in the food pantry that you support or as large as seeing your name on a building on the campus of your alma mater – face it, many of us crave the “warm fuzzies” we feel when we support a cause, particularly when we see results or achieve personal recognition for our efforts. Certainly this is a non-tax benefit of lifetime charity, a guilty pleasure if you will, but one you can enjoy without having to admit it!
- Lifetime giving patterns are a good indicator of your charitable intent and can be instructive for those who survive you. This is most important if you create a private foundation or some other charitable vehicle that will outlive you. Your surviving board members, often family, can view your lifetime actions as a roadmap of your values. Such a roadmap may help them continue your legacy in a way that, presumably, reflects your charitable intent.
Again, these are general rules which should be discussed and quantified with your tax advisor before implementation. But the fact is, in most cases, charitable gifts made during lifetime yield better tax results and often more personal satisfaction for the donor.
[1] Subject to income and other limitations, including the type of contribution and the type of charity.
