Gifts of Retirement Plan Assets
Congress has provided generous incentives to encourage retirement savings. Through "qualified" retirement plans, you can make contributions from your pre-tax income and build on a tax free basis a fund for future use. The amounts in the fund are not subject to income tax until they are actually withdrawn. (The "Roth" IRAs differ in that they feature contributions of after-tax dollars, with tax free withdrawals in future years.) Individuals wishing to make charitable gifts from their retirement accounts must first withdraw the savings and pay the taxes (and a 10% penalty if the donor is younger than 59 ½) and then make their tax deductible charitable gifts. Because of this, funds from qualified retirement accounts made during one's lifetime generally do not make tax-wise gifts.
But there's a very useful exception to this rule: the charitable IRA rollover. With a direct rollover, persons who are age 70-1/2 or older can make direct distributions from traditional or Roth IRAs to Kenyon without incurring any federal income tax on the withdrawn amount. Withdrawals up to $100,000 are eligible for the tax-free treatment. These transfers must be made directly to Kenyon as "qualified charitable distributions" or "charitable IRA rollovers." The distributions must be made directly from the IRA trustee to Kenyon to qualify. The direct, tax-free charitable distribution may be used to satisfy some or all of your minimum required distribution for 2011. Learn more about how to initiate a charitable IRA rollover.
One tax-advantaged use of retirement funds for charitable purposes is through the making of charitable bequests. This is because retirement plan assets are regarded in a special way by the tax laws: They are regarded as "income in respect of a decedent" or IRD assets; that is, they comprise income to which one was entitled during one's lifetime but did not receive. Unlike conventional assets, which receive a stepped-up cost basis in the estate of a decedent, IRD assets are taxed for income tax purposes in the hands of the recipient just as they would have been taxed if received by the decedent prior to death.
If the retirement plan directs that proceeds should go to the decedent's estate, they will be included on the estate's income tax return. If the proceeds are directed to go to a beneficiary, such as a spouse or child or other individual, they will be included in the gross income of that individual in the year they are received. Thus, an income tax is imposed in addition to any estate tax. If proceeds are directed to go to a charitable organization, neither the decedent's estate nor heirs will realize income from the plan; rather, the income will be realized by the tax-exempt charitable organization and no income tax will be paid.
Giving IRD assets to charity on a testamentary basis makes sense: Whereas the highest estate tax rate on standard assets is basically 35%, the combination of estate and income taxes on IRD assets can trigger an effective marginal tax rate in excess of 60% for taxable estates over $5 million. The charitable tax deduction offers relief from both of these taxes.
How does one do it? Ask the administrator of your plan for a Change of Beneficiary form and indicate the amount or percentage of the assets you wish to be used for charitable purposes and to which charity (or charities) it is to go. You can change your beneficiary at any time. The consent of a spouse may be necessary in some instances.
For questions on giving retirement plan assets to Kenyon on a testamentary basis, contact us.Back to Top