IRAs: Overlooked Major Gifts

August 5, 2009 by  
Filed under Featured


Major Gifts and IRAs

Naming a church as the beneficiary of one of your IRAs is a great idea. It will provide tax benefits in some instances and help many people after you are gone. However, you must be careful to structure the IRA and the beneficiary arrangement properly or you can run into problems.

Churches would be wise to educate their membership on all the planning techniques with regard to IRAs as they are a tremendous source of major gifts.

An Estate Planning Example

Naming a church as an IRA beneficiary provides an estate tax charitable deduction at death. This is a simple way to reduce the taxable estate. Given the mega-IRAs of today, this would represent a major gift to the church. Here’s an example that eliminates any estate tax altogether.

Assume a single person with an estate of $4,500,000. If the person dies in 2009, current law allows them to pass $3,500,000 to their heirs free of estate tax. This leaves $1,000,000 subject to estate tax. However, if this $1,000,000 were the balance of a traditional IRA with the beneficiary properly set naming a church or charity as the beneficiary, the $1,000,000 estate tax charitable deduction would reduce the estate to $3,500,000 and no tax would be due.

The charity would receive the $1,000,000 completely free of income tax. The income tax issue does not apply to a Roth IRA as Roth IRA distributions at death are generally received income tax free.

Communicating this one simple example could result in several major gifts from an average-size congregation.

Cautions to Preserve the Stretch IRA Option

Even though the stretch IRA would defer major gifts to a church, the ultimate gift can be substantially greater. Retaining the ability to stretch the required minimum distributions (RMD) out as far as possible is important. If you stretch the RMD over several generations, I can show you how an IRA balance of $100,000 can generate 10 million dollars in income.

If a person other than an individual is named as a beneficiary of a traditional IRA, the IRA will be treated as having no beneficiary. This means the distribution must be paid out over five years or the remaining life expectancy of the IRA owner, depending on the age at death, and the ability to use any stretching techniques is lost.

Educating members within a church about the proper beneficiary arrangements for a Roth IRA may result in major gifts, as Roth IRAs with no beneficiary must be paid out over five years.

The key here that may inadvertently create a problem is that a church is not an individual. Typical examples would be an IRA, which named both the spouse and a charity as a beneficiary, or a trust with a charitable beneficiary.

The solution is to use a separate IRA for the church. If you have more than one IRA, pick one if the amount is what you want to give or split one IRA into two.

Lifetime Gifts to Charity

A person can receive the same estate-reducing benefits by gifting IRA assets during their lifetime. A number of major gifts can be obtained by setting up a campaign to inform parishioners about the IRA Charitable Rollover discussed below. Here, generally, are the rules:

  1. You must take a distribution from your IRA.
  2. This distribution may be fully or partially included in your income. The exception is the exclusion provided by the Pension Protection Act of 2006 (PPA 2006) summarized below.
  3. This inclusion, however, is offset by the ability to take an income tax deduction for your charitable contribution if you itemize.

Cautions for Lifetime Giving

The amount of your charitable deduction may be limited to 50%, 30% or 20% of your adjusted gross income depending on the asset given and the charity to which it is given. Excess amounts can be carried over for five more years. You will want to sit down with your tax advisor and do some projections to assure that you are getting the maximum deductions in the years you want and that no deductions are wasted.

The good news is that the inclusion of the distribution increases your adjusted gross income. Therefore, the applicable charitable deduction percentage is applied to a higher number. However, there may be an unfavorable result if the increase in income causes itemized deductions and personal exemptions to be phased out. Again, see your tax professional.

The exception to this discussion lies in a section of PPA 2006 that allows certain distributions made to charity to be excluded from income. Here are some of the rules that apply:

  1. The IRA owner must be 70 ½.
  2. Only traditional and Roth IRAs are eligible; SEPs and SIMPLE IRAs are not.
  3. The maximum amount you can give which is excluded from income is $100,000.
  4. The charity must be a 50% public charity. Churches are 50% charities.
  5. The transfer must be made directly from the IRA trustee to the charity.
  6. This only applies in 2009 (unless Congress extends this beneficial provision).
  7. You can’t also take an income tax deduction for the distribution to charity.

If you have a SEP, SIMPLE IRA, any qualified plan such as a 401(k), a tax sheltered annuity or a 457 government plan, think about rolling all, or a portion, over to a traditional IRA and then making the desired charitable distribution. Don’t roll over to a Roth as conversions to Roths are taxable.

For more information on IRA Charitable Rollovers and how your church can be the recipient of major gifts, see my post on the subject at How To Make Tax Free Transfers From Your IRA.

As you can see, naming a church as the beneficiary of your IRA can provide tax benefits.  If you make a gift during your lifetime, you can have a warm feeling in your heart as you see the tangible results of your gift. However, the beneficiary arrangement has to be set up properly and the rules followed.

A church needs to communicate the IRA gifting options to its members. Not to do so is leaving a ton of major gifts on the table.

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  • Brooke Fraser


One Response to “IRAs: Overlooked Major Gifts”
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