How to Maximize Charitable Donations for Estate Tax Planning

Starting in 2026, the exemption on estate taxes will be halved, exposing more individuals to a 40% tax on an estate’s assets above $7 million to $7.25 million for individuals and $14 million to $14.5 million for couples.¹

The upcoming change presents a dilemma for individuals who wish to bequeath some of their wealth to charity. Taxes could limit the money available for donation, but there are options that can reduce estate taxes and maximize donations.

Minimizing the impact of the tax changes means finding ways to give away money immediately rather than after death. That means finding tax-efficient ways to donate now or setting up a vehicle that will outlive the donor over many years.

Three strategies to optimize charitable donations for estate tax planning

Options to handle charitable donations for estate tax planning include donor-advised funds, charitable trusts and a family foundation. Each has advantages as well as drawbacks, and understanding the nuances in each vehicle is essential to making the right decision.

Here's what to consider with each:

Donor-advised fund: DAFs are fairly straightforward and offer an easy way to give to multiple charities, reducing the taxable assets of an estate. Advantages include tax deductions for donations as well as tax-free growth of assets within the fund. In addition, there are no annual reporting requirements and no required distributions to charities. DAFs are also less costly to manage than either charitable trusts or foundations.

Drawbacks include a lack of control. While donors can advise, once they have made the donation, they cannot control what, when and how much is donated to various charities.

Charitable trust: Like DAFs, donations to a charitable trust are tax deductible and assets enjoy tax-free growth within the trust while reducing the tax burden on the estate. Depending on how it is established, a charitable trust may also offer donors a steady stream of lifetime income and then, upon the donor’s death, provide a designated charity (or charities) with the remainder of the assets.

Alternatively, the trust could provide a charity with annual income while the donor is alive, and then upon passing, the donor’s beneficiaries could typically receive the remainder of the trust as an inheritance.

In addition to receiving a desired income stream, the donor retains control of the trust. It’s important to remember, however, that charitable trusts are costlier than DAFs to set up and administrate, and information about the trust’s finances may be available to the public.²

Family foundation: In addition to having the same tax advantages as a DAF and charitable trust, a family foundation enables the donor to create a family legacy to share values with descendants. Through a family foundation, a donor can help teach family values through hands-on involvement in charitable management and decision-making.

A family foundation has restrictions. For example, at least 5% of the foundation’s assets must be distributed each year. The additional costs and administrative tasks required in managing a foundation can be large: The donor must create the foundation, hire staff, meet annual reporting requirements and pay a 1.37% excise tax on investment income.

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This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

¹ EideBaily, “Estate and Gift Tax – Estate Planning Now and for the 2026 ‘Double Exemption’ Sunset,” accessed July 10, 2024.
² IRS, “Charitable Trusts,” accessed July 23, 2024.