| Charitable Contributions / Charitable planning for retirement benefits |  |
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For charitable-minded clients there
are numerous tax advantages of giving qualified retirement plan and
individual retirement account (IRA) benefits to a charity. When funds are drawn out of
retirement plans and IRAs by noncharitable beneficiaries, federal income
tax of up to 39.6% will have to be paid. State income taxes also may be
owed. Furthermore, retirement funds possessed at death may be subject to
substantial federal estate tax and state death tax. Retirement benefits are to be
contrasted with other assets that can be passed to noncharitable
beneficiaries free of income tax. For example, an individual inheriting
stock worth $300,000 from his parent that was purchased by the parent
for $100,000 won't have to pay income tax on the $200,000 appreciation.
That's not the case for retirement benefits. They are subject to both
income tax and estate tax. A special income tax deduction for the estate
tax helps noncharitable beneficiaries but the combined income and estate
tax can still be quite substantial. Because of this double tax bite,
someone who plans to make charitable gifts should consider naming a
charity as beneficiary of his IRA or retirement plan to gain these
advantages:. . . . The retirement benefits going
to the charity won't be subject to federal estate tax and generally
won't be subject to state death taxes. . . . The estate won't be considered
to receive taxable income when the benefits are paid to the charity. . . . The retirement account owner's
surviving spouse, children and others who may be beneficiaries of the
estate won't be considered to receive taxable income when the retirement
benefits are paid to the charity. . . . The charity won't have to pay
federal income tax on distributions from the qualified plan or IRA and
generally won't have to pay state income taxes. Maximum tax savings can be realized
by naming a charity as exclusive beneficiary of one's retirement plan or
IRA. However, there are these options for one who is not in a position
to leave his entire retirement benefits to a charity: . . . An individual with two or more
retirement plans (e.g., an IRA and a profit-sharing plan or two IRAs)
can leave one to a charity and the other(s) to family members. . . . An individual with a single
IRA can split it into two IRAs and leave one to a charity. This can be
achieved tax-free through a rollover or a trustee-to-trustee transfer. . . . A married individual can have
his benefits paid to a QTIP trust for his spouse with a charity to
receive the benefits that remain at the death of the surviving spouse.
The marital deduction will shield the benefits from estate tax when the
individual dies. When the surviving spouse dies, the remaining benefits
will go to the charity free of estate and income tax. . . . An individual can have his will establish a charitable remainder trust at his death to provide a noncharitable beneficiary with a fixed annuity for a set number of years not to exceed 20 or for life, with the remainder going to charity. |
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