Fundraisers have a significant role to play in the potential upcoming reset.
Planned giving is not only important—it’s urgent! Your major donors are creating or revisiting their estate plans right now, or if they aren’t, they should be.
Here’s why so many people are turning their attention to their estate plans and how you can help them prepare and preserve their legacies through planned giving.
There’s a hefty price to pay for poor estate planning, and it’s about to get heftier.
Every person is allowed to transfer a certain amount of wealth to heirs throughout their lifetime without paying gift or estate taxes. Currently, an individual can transfer any amount up to $13.61 million ($27.22 million per couple) to heirs. Anything transferred in excess is subject to gift and estate tax at a rate as high as 40%. If you can avoid being taxed at 40%, you want to!
The Tax Cuts and Jobs Act of 2017 overhauled the federal tax code to provide greater tax relief for individuals and businesses. In addition to doubling the standard deduction for individuals, it doubled the lifetime gift and estate tax exemption amount from $5.49 million to $11.18 million, which has adjusted each year for inflation.
The time for taking advantage of this large exemption may be ending, because the act is scheduled to sunset on December 31, 2025. When it does, the lifetime estate tax exemption will decrease by about 50%, down to an estimated $7 million per individual ($14 million per couple).
It’s possible that new legislation could be passed by Congress to extend or modify this exemption amount, but as it stands, this benefit is set to expire, and if anyone desires to pass more than $7 million to heirs ($14 million per couple), they should start planning now.
The following items are important to consider for major donors revisiting their estate plans:
- Your taxable estate includes not only your investment portfolio and other liquid assets, but also your home and other real estate and any stakes you may have in private businesses. Even if these items are below a valuation of $7 million, they could appreciate to exceed that in future years.
- You can transfer cash directly to children or other family members in accordance with annual giving limits, but remember that signing a check for millions of dollars made out to a child can have some drawbacks. Certain trusts allow you to transfer assets to heirs with more conditions and control over when beneficiaries receive distributions.
- Your beneficiaries receive a step-up in cost basis to market value for assets they receive upon your death, but they must use your original cost basis for assets they receive during your life. To lessen this tax burden, it could make sense to pass assets with a higher cost basis to heirs and those with a lower cost basis to charity or using them to fund a charitable trust.
- Think about how much of your estate you wish to pass to heirs. Even though your estate may be greater than $7 million, you may find that you only wish to pass on $4 million because you want your kids to learn the value of hard work or the importance of earning income for themselves. If that’s the case, now is still a good time to take a holistic look at your estate plans and consider how you can make a lasting and tax-advantaged impact through charitable giving.
We aren’t guaranteed tomorrow. Start talking to donors about planned giving today.
As these donors account for the current size of their estate, how much they wish to transfer to heirs, and how this potential exemption change may affect their family’s plans, they should also consider what legacy they wish to leave through the transfer of this wealth.
There is no reason why their dreams throughout life cannot continue to be pursued by family members and organizations that champion them after they are gone. Charitable giving can significantly lower their subjection to gift and estate taxes and can further their wishes, both now and in the future.
As fundraisers, you are uniquely positioned to help your donors avoid unnecessary taxation and define and preserve their legacy. Don’t miss the opportunity to walk alongside them as they think through their legacies and the lasting impact they wish to have on the lives of their families and communities.
