Planning for Charitable Gifts

Many clients wish to provide for their favorite charities in addition to their loved ones. While sometimes charitable giving is as simple as writing checks, with proper planning it is possible to make gifts to loved ones and charities in a manner that insures that each gains the greatest advantage from what they receive. 

As we discussed in our last blog, Arthur and Beth married after re-meeting each other after decades apart while volunteering with a favored charity. Their involvement with this organization continues to be a major part of their lives together and both of them wish to provide for the organization financially after their death. Thankfully, their lives apart resulted in a situation where both Arthur and Beth have the means to continue to save money during their retirement, despite rising costs in their lives, and therefore they should be able to fulfill their charitable inclinations without creating hardship for their surviving spouse. 

Both Arthur and Beth receive pensions from their former employers and this allowed them to delay receiving Social Security benefits and thus increasing the amount they receive from that benefit. Further, each benefited from wise investing after the death of their first spouse, giving them a sizable if not overly large nest egg. On top of these advantages, both Arthur and Beth have IRA accounts that they funded during their working years, and they now draw upon these accounts in the case of emergencies but otherwise only take the Required Minimum Distributions. While not everyone enjoys these advantages, Arthur and Beth were fortunate to have circumstances that allowed them to do so and now can take advantage of other strategies to help achieve their planning goals. 

Despite their financial stability, Arthur and Beth are unlikely to ever have an Estate Tax liability. This is especially true in light of the recent legislation that raises the exemption threshold for each of them to nearly $11 million. There are, however, other taxes that may impact their loved ones as they receive inherited assets; the most prominent of these is Income Tax. While most inherited assets will not have any related income taxation (or at least receive a stepped-up basis to limit potential taxation), when Arthur or Beth’s children receive distributions from an IRA inherited from their parent, those children will incur Income Tax liability at their individual rate on the funds distributed each year. This is a primary reason it is normally advisable to “stretch” inherited IRA distributions over the lifetime of a beneficiary. Arthur and Beth want to take another tactic with their planning, eliminating the potential tax liability and fulfilling a different goal.

Arthur and Beth have decided to name each other as the primary beneficiary of each of their IRAs, so that the survivor of them can roll over the account into their own IRA and continue to have access to those funds if needed after their spouse’s death. Each has then indicated that after the death of their spouse they will name their favored charity as the beneficiary of the remaining IRA assets, allowing those funds to pass to the charity. The benefit here is a substantial gift to a worthy charitable institution and the ability of the charity to take distributions from the IRA without incurring the Income Tax liability that an individual beneficiary would incur. It is worth noting that there are risks to this strategy as Arthur and Beth have structured their plan. 

By naming each other as the primary beneficiary of their IRAs, both Arthur and Beth risk their surviving spouse changing the contingent beneficiary designation from the charity of their choosing to another charity or even to other individuals. Arthur and Beth could avoid this risk by naming the charity as the primary beneficiary but they trust each other and feel it is important that the survivor of them have access to the IRA funds if necessary to address emergencies. It is important to note that this planning works with traditional IRA accounts, but is not generally advisable when dealing with Roth IRAs due to the differing tax consequences. 

As we continue to remind our readers, all of these planning opportunities arise due to working with experienced professionals, attorney, financial planners, and accountants who can guide you to success. None of the examples used in this blog are appropriate for every person and you should not attempt anything you read about here without consulting experts to avoid unanticipated (and costly) results.

Matt and Al