In the past, many people’s wills or trusts included a sizable donation to charity. Because the federal estate tax was so burdensome, including charitable bequests in a will or trust was a good idea since it reduced the amount of tax the estate had to pay.
Now, however, the federal estate tax applies only to estates of more than $5.45 million. The Illinois estate tax applies to estates which exceed $4 million. As a result, for a great many people, leaving money to charity in a will or trust no longer provides any tax benefit.
On the other hand, federal income and capital gains taxes have gone up, a new surcharge has been added on investment income, and many states have raised their income and capital gains taxes as well. As a result, many people could reap significant tax savings if they made planned annual gifts to charity while they’re alive, as opposed to making bequests in a will or trust. Charitable lifetime gifts of assets which have increased in value ca provide a deduction for the fair market value of the gift and avoid capital gain tax on the gain.
If you have an older will or trust that includes a significant charitable bequest, this might be a good time to reconsider whether you could save taxes by writing the charity out of your will and instead making regular donations each year. Another income tax strategy is to designate one or more charities as a “pay on death” beneficiary for a portion or all of an IRA or other tax-deferred retirement account.