Planned Giving Arrangements IRA's


 In a previous blog, we introduced the concept of ‘planned giving’. There are many reasons that your nonprofit organization or church should know about planned giving and how it can benefit your mission while serving your donors/members.  This is one in a series of articles discussing the ‘tools’ of planned giving. 

Most people today have an Individual Retirement Account or some similar type of retirement plan.  In fact, many people’s retirement savings are principally represented by their IRA.  An individual who has such an account received tax advantages while they were contributing to it.  Then they enjoyed special tax deferments while the account was growing.  The idea is that most people would contribute to their IRA during their earning years – their higher tax-bracket years, then start taking money out when their tax rate would be less. 

These type of accounts are referred generally to as IRD assets (income in respect to decedent).  SEP, Keogh and profit sharing plans are also considered IRD assets.  They have been the cornerstone of many people’s retirement income. 

They are WONDERFUL retirement instruments!  But they are not as good when it comes to using them for bequests.  Here is why.

Assuming your estate falls under the amount of the estate tax exemption (currently $5.43 million), most assets that you would bequeath to your heirs would be tax free.  This includes cash, personal property, real property etc.

However, that does not apply to an IRA or any IRD asset.  While an IRA would also be exempt from ‘estate tax’, the IRA is fully subject to INCOME tax for the beneficiary, unless it is the spouse.  If you left your IRA worth $100,000 to your child, the child would probably only net about $70,000 after paying income tax.  This, of course, depends on the heir’s tax bracket.

If a person wants to leave a bequest to a charity, one of the best assets to consider is their IRA.  Remember the church or charitable organization is exempt from income tax.  So instead of realizing only $70,000 like the heir did, the charity will receive the full value of the IRA – in this case $100,000.

 The principle here is that organizations that are tax-exempt should be given assets that are eligible to be taxed.  On the other hand, anyone who will be subject to taxation (heirs) should be given assets that will not be subject to income tax.

 One of the outstanding benefits to using IRA’s for gift planning is that it is so convenient to do.  Charitable intent can be included in a person’s estate plan by merely changing the beneficiary of the IRA.  Sometimes this involves naming the charitable organization as the secondary beneficiary after the primary beneficiary, who is usually the spouse.  Another convenience of this strategy is that multiple charities can be included by designating a percentage to various organizations.  Heirs can still be included by a designated percent as well.

 Whatever charitable organization you are associated with, there are many individuals who would be glad to know about this convenient, inexpensive method to remember that organization.  As is the case with all of the strategies we will discuss, the individual should consult with their own attorney and tax advisor.