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Retirement Accounts

Gifts during a donor’s lifetime
The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) became law on December 20, 2019. The Secure Act made major changes to the rules governing Required Minimum Dsitributions (RMD) from an IRA. If you reached the age of 70½ in 2019 the prior rule applies, and you must take your first RMD by April 1, 2020. If you reach age 70 ½ in 2020 or later you must take your first RMD by April 1 of the year after you reach 72.Donors aged 70 ½ or older are allowed to use the required minimum disbursement (RMD) from an IRA account to make a direct donation of up to $100,000 to a charity, tax-free. IRS tax information re: IRA contributions. While your client would not receive a charitable deduction for this type of gift, as the funds must go directly to a charity, your client would not have to claim it as income and would therefore not be taxed on the amount. After 9 years of this provision requiring yearly government renewal, it was made permanent as part of the Protecting Americans from Tax Hikes (PATH) Act in December of 2015. For more information on IRS restrictions related to this type of gift, click here.

Gifts of retirement accounts during a client’s lifetime example:

• • Client profile:
    • Anthony, a retired doctor, is 72 and is required to start taking the required minimum distribution from his IRA account.
    • Anthony is currently in the 22% tax bracket, but the IRA distribution (counted as income) will push him into the 24% tax bracket and force him to pay more income tax.
  • Client opportunity:
    • Anthony transfers his IRA distribution directly to the Community Foundation.
    • Although he does not receive a charitable income tax deduction, because the distribution was transferred to a nonprofit organization, it is not counted as additional income for Anthony’s tax purposes. He remains in the 22% income tax bracket.
    • At Anthony’s request, the Community Foundation places the proceeds from the IRA distribution in its endowed Health & Wellness Fund*. The Community Foundation awards yearly grants from that pooled fund to nonprofits working in the area of healthcare. (Note: *The IRS does not allow donors to direct gifts from an IRA distribution to a donor advised fund. All IRA distribution gifts must be directed towards one of the Community Foundation’s community impact funds, designated funds, or our general purpose fund.

Gifts through a client’s estate distributions
Retirement funds paid to children upon a donor’s death can get hit with heavy income and estate taxes (sometimes up to 70%), however they are tax-free when passed to a charity.

By naming a charity as the beneficiary of a retirement plan, your client may give these heavily-taxed assets to charity, while leaving more favorably-taxed property to family.

 Gifts of retirement accounts through client’s estate example:

• • Client profile:
    • Alice’s husband Mark just died of cancer. They have one adult daughter who lives in another state. During Mark’s lifetime, he loved dogs and was on the board of the local animal shelter. Alice is a painter and long-time supporter of the arts.
    • Alice has assets worth $3 million that include a 401k plan worth $100,000.
    • While Alice wants to provide for her only child after she is gone, she also wants to leave a local legacy that would be meaningful to both her and to Mark.
  • Client opportunity:
    • Alice files a change of beneficiary form with her 401k plan and names the Community Foundation as the plan’s beneficiary.
    • Alice creates a charitable fund at the Community Foundation. In the fund agreement, Alice states that upon her death, the beneficiary payout from the 401k should be used to provide yearly grants to the local animal shelter and an art school.
    • As the Community Foundation is a 501c3 charity, it pays no income tax on the amount received from the retirement account.  By contrast, had Alice’s daughter received the 401k, she would have had to pay the deferred income tax as she withdrew the funds.  Thus, Alice’s daughter is left with an inheritance that includes assets that are more favorably taxed. Additionally, the gift reduces the taxable value of Alice’s estate, resulting in it owing less estate tax.  Not only does Alice provide for her daughter after she is gone, she also leaves a significant community legacy.

    Please contact Elena for further details about this type of gift.