Q: I’m working on my estate plan. I want to leave money to charity after I pass, but I’m worried about how the money might be spent by them in the future. How can I make sure my donations will be put to good use, even after I’m gone?
A: Given your concerns, you might consider the use of a “testamentary” donor-advised fund (DAF). The word, testamentary, simply means that the DAF is created upon your death, not before.
A donor-advised fund is a tool for your charitable giving where you get to “advise” on where the money should go in the future. While you no longer have true, legal control over the money you’ve donated, a DAF effectively allows you to choose the charities to support and the timing and amounts of the donations.
Upon your death, you can name other people (let’s say, your kids) to assume your role in advising on future donations. Having them oversee future donations might alleviate your concerns about the future use of the money. The key thing is to explain your wishes and then hope they listened!
Q: We are considering selling one of our homes. We’ve heard there’s a capital gains exclusion, but we’re not exactly sure how it works. How do we qualify for this tax break, and what should we do now to make sure we can use it?
A: To start, the capital gain exclusion is only for your primary residence. Legitimately establishing your primary residence does take some specific steps that might be a bit cumbersome. Frankly, given the size of the tax benefit, it’s purposely designed to be somewhat difficult to use, especially if you are just trying to work the system.
When you sell your primary residence, you are entitled to a capital gains exclusion of up to $250,000 each. As a married couple, this works out to a $500,000 capital gain exclusion. However, there are specific tests that you must pass to use this gain exclusion.
In short, your property must have been your primary residence for two of the past five years. To help you prove it was your primary residence, there are some tell-tale signs that can help support your claim.
Among them, the property’s address should be used on your tax returns, voter registration, financial accounts, utility bills and your car registrations. Also, it would make sense for this property to be taxed as your primary residence, not as a second home, obviously. Finally, consider having some proof that you are actually a part of the community, such as participation with local organizations.
Bottom line, the overall facts and circumstances of your life, routine and general habits should align with the claim that you are, in fact, selling your primary residence.
