Making a charity the beneficiary of a tax-qualified account, such as an IRA or Retirement Plan, would be a future gift. It’s a relatively simple strategy to implement. There are income tax consequences to consider and depending on your own personal financial circumstances (and transfer tax laws at the time of your death), there could be transfer tax savings. For this strategy, we are discussing leaving a legacy to a charity near and dear to your heart by making it the beneficiary of a tax-qualified account such as a traditional IRA or Retirement Plan. You’ll recall from last month’s discussion, when a beneficiary is named on an account with the financial institution where it is held, upon the death of the account owner, that asset passes by law to the named beneficiary. In this way, it helps to streamline the task of the estate executor or personal representative. However, when dealing with tax-qualified assets, understanding the income tax implications of this type of gift is important as well.
Many people will have both non-qualified assets as well as tax-qualified (traditional IRA or Retirement Plan assets.) When you want to leave a gift to charity, it may be prudent to consider designating the tax-qualified (retirement) assets for your charitable gifts. Under current law, upon your death your spouse may roll over your IRA to his or her ownership and continue to defer taxes. However, when you have non-spousal heirs (such as your children or a non-marital life partner) your tax-qualified assets are considered “income in respect of a decedent” and subject to income taxation. Basically, for these assets that have enjoyed tax deferral as they’ve grown, the IRS is determined to take their portion; frequently that tax must be paid immediately or in a relatively short period of time after your death. Depending on the size of your estate and current transfer tax laws when you die, your tax-qualified accounts may also be subject to transfer tax. With this combination of taxes on your estate, it could consume up to 70% of the inheritance!
When you name a charity as the beneficiary of your tax-qualified assets, it passes free from both income and transfer taxes. It is important to designate the charitable beneficiary correctly with the financial institution where the account is held so that the assets pass directly to the charity and don’t pass through your estate. When you are married and choose to name someone (or an entity) other than your spouse as the beneficiary of a retirement plan, the designation may require written agreement from your spouse. This strategy calls for careful discussion with licensed tax and legal advisors to determine which type of your assets – tax-qualified or non-qualified – would be best to leave to your family and which to charity.
Naming a charity as the beneficiary of an account can help to ensure that a portion of your legacy passes to those causes that are near and dear to your heart. NAZCCA would welcome your gift, whether current or future, in whatever amount your heart and finances dictate. (Link to Donate page)
Bonnie Lane - Member, Board of Directors
NAZCCA is not licensed to give legal or tax advice and any planned giving strategies you choose to pursue should be discussed with licensed tax and legal counsel