IRAs: Overlooked Major Gifts

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.

How To Attract Major Gifts

An IRA is one of the worst assets to leave to your heirs. Here’s an alternative that can save tax on your IRA and benefit your church.

Meet Bill and Ann. Bill is retired and has an IRA worth $1,000,000–not unusual in today’s mega-IRA world. They both have other assets: Ann’s 401(k) from her career, their home, other investments and the proceeds from the sale of Bill’s business.

Bill has named Ann the beneficiary of his IRA. When he dies, Ann will re-name the IRA in her name, continue to draw income for the balance of her life and then leave it to their three children.

A “typical” plan. Exactly what most people do.

But it’s a tax disaster.

Take a look at the “before and after” results (just with respect to Bill’s $1,000,000 IRA) in the chart below. Plan A is Bill and Ann’s current plan. Plan B shows the results of a technique I teach in The Smart Giver.

Which looks like a better plan to you?

Most people are what I call “flying blind.” They don’t even know there is a Plan B.

Your church probably has a number of “Bill and Anns.” Knowing about Plan B can endow your church in just a couple of transactions.

The Treasury Department estimates there are currently 3 trillion dollars in IRAs. Right behind this are 60+ million Baby Boomers (the oldest turning 63 this year) who hold 12 trillion dollars in qualified plans such as 401(k) plans.

Will your church get its fair share? Could you help people within your congregation divert money that otherwise would go to the government to their heirs and your church?

For more information about this plan, see the video entitled, “How To Leave 100% Of Your Estate To Your Children Tax Free” on my video podcast site.

This concept is also the subject of one of the 16 lessons in The Smart Giver, an educational series designed to help people increase their income, reduce taxes and help their church all at the same time.

Review: Mega Gifts by Jerold Panas

If you are a church leader, who is even remotely involved with fundraising, as soon as you finish reading this post, drop everything, go online, and buy Jerold Panas’ book, “Mega Gifts –Who Gives Them, Who Gets Them.”

Jerry Panas is one of the deans of fundraising. Armed with forty years of experience, Panas interviewed 50 men and women who had made gifts of one million dollars or more and surveyed about 1,000 fundraisers.

His goal? To document the factors that leads to and motivates donors to make mega gifts.

Virtually every page contains a gem of wisdom that can make the difference between your visit to a potential major donor a success and going home empty-handed. Here are some examples…

Preparation

• Why 85% of securing a major gift is in getting the appointment.
• Why “doing your homework” can be the difference between success and failure.
• Who is the best person to make the initial contact and set the appointment?
• What is the one element of an organization’s staff that Panas found to be a requirement in every major gift?

The Approach

• Who is the best person to set the appointment?
• Can you reach a donor through his or her children?
• Why no one ever got milk from a cow by sending a letter.

The Presentation

• What is the most important aspect of your church’s appeal for funds?
• Why should you sell this first?
• Why involving both spouses can prevent your most compelling presentation from failing.
• Is a donor’s close friend a good choice for making the presentation?
• How many people should attend the presentation?
• Should be presentation be done over lunch?
• What is the chance of getting a major gift on the first visit?
• How many visits should you make to a major donor?
• Why is listening the most important component of the fundraising presentation?
• What you should be listening for?  When you find it, what should you do next?

Ask

• Why “ask and you shall receive” is a critical component.
• How many times should you ask?
• Why “you’ll be hurt more by those who would have said, “yes,” but weren’t asked than by those who say, “no.”
• What is the “Rule of Thirds” and how can applying this rule multiply your results?
• What is the “greatest commandment” of fundraising?

Donor Mind Set

• Are major donors’ decisions to give spontaneous or do most want to think it over?
• Why most donors are not motivated by the needs of your organization.
• Can you secure a major gift by making the donor feel guilty?
• What is the singular most compelling reason a donor makes a major gift?
• Why do major donors make gifts?  Why incorporating the answer in your presentation is essential.

Mega Gift Characteristics

• What is the “Rule of Sevens” and why it can lead to larger and larger subsequent gifts?
• Are “matching gifts” effective?
• What kind of a gift suggestion will often increase the donor’s gift?
• Does a major donor have to be a member of your organization?

‘Nuff said. Buy the book.