If you are someone who gives to charity during your lifetime, you have probably thought about continuing that giving after you are gone. And if you are an Illinois resident with an estate above or near the $4 million threshold, charitable estate planning is not just generous. It can also be one of the smartest tax strategies available to you.
There are several ways to build charitable giving into your estate plan, ranging from simple bequests to sophisticated trust structures. The right approach depends on how much you want to give, what assets you are giving, and how you want to balance charity with providing for your family.
Simple Charitable Bequests
The easiest way to include charity in your estate plan is through a direct bequest in your will or trust. You simply specify that a certain amount, a percentage of your estate, or a specific asset goes to the charity of your choice when you die.
For example, your trust might say “I give 10 percent of my residuary estate to the Bloomington-Normal YMCA” or “I give $50,000 to my church.”
A charitable bequest reduces your taxable estate for both federal and Illinois estate tax purposes. The estate receives a charitable deduction for the value of the bequest, which can bring your estate below the $4 million Illinois threshold or reduce the amount subject to tax.
Charitable bequests are simple, flexible, and revocable (you can change your mind at any time by amending your trust). For most families, this is all the charitable estate planning they need.
Beneficiary Designations for Retirement Accounts
This is one of the most tax-efficient charitable strategies available, and it is underutilized.
When you leave retirement account funds (like an IRA or 401k) to your children, those funds are subject to income tax when withdrawn. Your children will pay federal and Illinois income tax on every dollar they take out.
When you leave retirement account funds to a charity, the charity pays no income tax. The full value goes to the charitable purpose.
If you want to give to both charity and family, consider naming the charity as beneficiary of your retirement accounts and leaving your non-retirement assets (which may receive a stepped-up basis) to your family. Your family gets the tax-advantaged assets, and the charity gets the fully taxable assets that it will not have to pay tax on.
This strategy can save your family significant income taxes while accomplishing your charitable goals at no additional cost to your estate.
Charitable Remainder Trusts (CRTs)
A charitable remainder trust is a more sophisticated tool that provides income to you (or your family) during your lifetime, with the remainder going to charity after the income period ends.
Here is how it works. You transfer assets into the CRT. The trust pays you (or a beneficiary you name) an annual income stream for a specified period, either a set number of years or for the rest of your life. When the income period ends, the remaining assets in the trust go to the charity.
CRTs offer several benefits. You receive an immediate income tax deduction for the present value of the charitable remainder interest. The trust can sell appreciated assets without paying capital gains tax, which allows you to diversify a concentrated position without the tax hit. And the assets in the CRT are removed from your taxable estate.
CRTs come in two main varieties. A charitable remainder annuity trust (CRAT) pays a fixed dollar amount each year. A charitable remainder unitrust (CRUT) pays a fixed percentage of the trust’s value each year, which means the payment fluctuates with the trust’s investment performance.
CRTs work best for families with highly appreciated assets (like stock or real estate) who want income during their lifetime and want to benefit charity.
Charitable Lead Trusts (CLTs)
A charitable lead trust is the opposite of a CRT. The charity receives income during the trust term, and your family receives the remaining assets when the trust ends.
CLTs are primarily used for estate and gift tax planning. The value of the charitable income stream reduces the taxable gift or estate transfer to your family. If the trust investments outperform the IRS assumed rate of return, the excess growth passes to your family tax-free.
CLTs are most effective in low interest rate environments and for families with substantial wealth who want to transfer assets to the next generation while supporting charity.
Donor-Advised Funds
A donor-advised fund (DAF) is not technically an estate planning tool, but it works well alongside one. A DAF is an account at a charitable organization where you make an irrevocable contribution, receive an immediate tax deduction, and then recommend grants to charities over time.
You can name a DAF as a beneficiary of your estate, which allows your family to continue recommending charitable grants after your death. Some families use DAFs as a way to involve children in charitable decision-making, which can be a meaningful legacy beyond the financial value.
Private Foundations
For families with significant wealth and a strong commitment to charitable giving, a private foundation provides the most control. You create the foundation, fund it with assets from your estate, and your family manages the foundation’s charitable activities.
Private foundations are expensive to set up and maintain, and they have strict regulatory requirements. They are typically appropriate only for estates with $1 million or more dedicated to charitable purposes.
Illinois Estate Tax Benefits
Every dollar that goes to charity is deducted from your taxable estate. For Illinois families near the $4 million threshold, charitable giving can be the difference between owing estate tax and owing nothing.
Example: Your estate is worth $4.5 million. Without charitable planning, you owe Illinois estate tax on the full amount over $4 million. If you leave $500,000 to charity, your taxable estate drops to $4 million, and you owe zero Illinois estate tax. Your family still receives $4 million, and $500,000 goes to causes you care about.
This is not always the right trade-off, as you may prefer to leave as much as possible to your family. But for families who are already planning to give to charity, structuring the gift through the estate plan maximizes the tax benefit.
How We Handle This at Haning Estate Planning
We help families integrate charitable giving into their estate plans in a way that makes sense for their values, their family, and their tax situation. Whether that means a simple bequest, a beneficiary designation on a retirement account, or a more complex charitable trust, we make sure it is coordinated with everything else.
Our flat-fee pricing includes charitable planning as part of your comprehensive estate plan. And at your annual check-in, we review your charitable provisions to make sure they still reflect your wishes and take advantage of current tax laws.
If charity is important to you, let us make sure it is part of your legacy.
Frequently Asked Questions
Can I change my charitable beneficiary designations?
Yes. As long as your trust is revocable and your beneficiary designations have not been made irrevocable, you can change your charitable plans at any time.
What if the charity I named no longer exists when I die?
Your trust should include a contingency provision specifying what happens if the named charity dissolves. You can name an alternate charity, direct the trustee to select a similar organization, or specify that the funds go to your family instead.
Do charitable bequests reduce my income taxes?
Charitable bequests from your estate do not provide an income tax deduction on your final return. They provide an estate tax deduction that reduces the taxable value of your estate. Lifetime charitable gifts provide income tax deductions.
Can I leave my house to charity?
Yes. You can leave real estate to a charity through your trust or will. However, the charity may not want to manage or sell the property, so it is a good idea to confirm with the charity before making this plan. Alternatively, a charitable remainder trust funded with the house can provide income to your family while ultimately benefiting charity.
How do I choose between a CRT and a CLT?
A CRT provides income to you or your family first, with the remainder going to charity. A CLT provides income to charity first, with the remainder going to your family. Choose a CRT if you need income during your lifetime. Choose a CLT if your primary goal is transferring wealth to your family at reduced tax cost while supporting charity during the trust term.
This article is for informational purposes only and does not constitute legal or tax advice. Charitable planning involves complex tax considerations. If you would like to discuss charitable giving in your estate plan, contact Haning Estate Planning to schedule a consultation.
Author Bio
Carissa A. Haning is the owner of Haning Estate Planning in Bloomington, Illinois. She has been practicing law since 2003, focusing on estate planning and probate, because she has seen firsthand how bad planning, or no planning, can tear families apart. Carissa’s goal is simple: prevent problems and litigation with good planning that starts by really getting to know each client. As a mother of three, she knows parents have limited time and resources, so she has made her estate plans accessible and affordable for every family.
