Estate gifts from retirement accounts. A combination of United States state and federal income taxes and estate taxes can diminish the retirement savings accounts of many individuals after their passing. Where estate planning to provide for heirs involves a variety of assets, it may be helpful to know that all taxes on Individual Retirement Accounts (IRAs), and other retirement accounts, can be avoided on amounts left to The First Church of Christ, Scientist, whereas those same assets left to heirs may incur significant taxes. Retirement accounts can also be left to a charitable remainder trust, or to fund the establishment of a gift annuity that pays income to family members, with later benefit to the Church.
How to make an estate gift from a retirement account. To include the Church as a beneficiary, please contact the trustee or custodian of your retirement account and request a beneficiary designation form. You can name the Church to receive all or part of the account, or as a contingent beneficiary in the event that the primary beneficiary passes on before you. If you are married, your spouse's written consent will be required to make a charitable gift of retirement benefits, except for benefits from an IRA. Another option is to make the Church contingent beneficiary of a retirement plan, but then granting to the heirs the right to disclaim (decline) part or all of their share, which would then pass to the Church free of taxes.
IRA gifts during lifetime: Congress OKs IRA "rollover" provision for charitable giving
On New Year’s Day Congress approved qualified charitable distributions for 2012 by IRA owners over age 70-1/2, up to $100,000, with the deadline for 2012 gifts extended through January 31, 2013. The provision is part of the American Taxpayer Relief Act of 2012, which President Obama has promised to sign into law.
What does this mean to supporters of The Mother Church who qualify to make IRA gifts?
- If you took a required minimum distribution in December 2012 (perhaps after abandoning hope Congress would renew the IRA gift law for 2012), a special provision allows part or all of that distribution to be treated as a qualified charitable distribution for 2012, to the extent of any cash gifts made to qualified organizations after your December distribution – including gifts made through January 31, 2013. Please contact us if you wish to consider additional cash gifts that would qualify as 2012 IRA charitable distributions.
- If you made a direct IRA gift during 2012, hoping Congress would renew the law for 2012, your optimism has been rewarded: The IRA gift provision is retroactive to January 1, 2012, and you will qualify for all tax benefits (see the discussion below);
- Any qualified charitable distributions made after December 31, 2012, but before February 1, 2013, will be considered made on December 31, 2012. These January gifts (up to $100,000) will not create any taxable income for donors for 2012 or 2013, but they apparently will not reduce donors’ income taxes for 2012.
- The IRA gift law has been extended for the entirety of 2013, so qualified donors can make direct IRA gifts of up to $100,000 for both 2012 (by January 31) and 2013 (anytime in 2013).
Here are some important points to keep in mind about IRA gifts:
- Charitable distributions are tax free in 2012 and 2013 up to $100,000 and, better yet, 2013 gifts will satisfy part or all of the required minimum distributions IRA owners must take after age 70½. That means income tax savings, even for donors who do not itemize their deductions. As noted above, these tax savings may also be available to IRA owners who took 2012 required minimum distributions in December, then followed up with cash contributions through January 31, 2013.
- Only the IRA custodian can transfer gift amounts to a qualified organization. If IRA owners withdraw funds and then contribute them to charity separately, amounts withdrawn will be taxable to the donor.
- IRA donors need receipts of the same kind provided for other types of charitable contributions. It’s important that donors coordinate IRA contributions with our office to ensure that appropriate documentation is provided.
- Owners of “inherited” IRAs can make gifts (if they are over 70½) , but other retirement plans, such as pensions, 401(k) plans and others are not eligible.
- IRA gifts cannot be made to charitable remainder trusts or for charitable gift annuities.
Please call the Philanthropy Team if you would like more information about making an IRA gift for 2012 or 2013.
Retirement accounts, such as 401(k) plans, 403(b) plans and Individual Retirement Accounts (IRA), are generally viewed as the better assets to leave through an estate plan to charitable organizations. When these types of accounts are the asset chosen to benefit loved ones, a combination of federal and state estate taxes, income taxes and even federal generation-skipping transfer taxes can significantly impact the net benefit, leaving little remaining for the intended loved ones.
- State and Federal Estate Taxes: The full, date-of-death value of retirement savings may be subject to federal estate tax, and many states impose death taxes as well.
- State and Federal Income Taxes. Both federal income tax and state income tax (depending on the place of residence of your heirs) will be due on death benefits from an IRA or other plan – costing up to 40% or more. Most bequests and inheritances come to heirs free of income tax – but retirement benefits (except for Roth IRAs) are fully taxed to your heirs or estate.
- Federal estate taxes (but not state death taxes) are a deduction against income tax paid by an heir. Generation-skipping transfer taxes apply when retirement savings pass to a grandchild or other “skip” person (above an exemption amount).
Estate taxes can be postponed when retirement assets pass to a surviving spouse. But an expensive visit from the estate tax and income tax collector – costing 60% or more – lies ahead, for married and unmarried individuals alike. The examples in the following chart show shrinkage that can occur for both small and large estates. Estate taxes assume the decedent died in 2012.
Erosion from Taxes of Individual Retirement Accounts
Total Income Taxes
Federal Estate Taxes
Remaining for Heirs
($500,000 total estate)
$100,000 IRA passes to children
$61,750 (62% From original $100,000)
Estate B (2012) (7 million taxable estate)
$20,000 (State) $343,000 (Federal)
$1 million IRA passes to children
$374,550 (37%) from original
The example of Estate A assumes children are in a 35% federal income tax bracket and a 5% state income tax bracket (assuming state taxes are deductible against federal taxes). The example of Estate B assumes heirs will be in a 35% federal income tax bracket and a 5% state income tax bracket (assuming state income taxes and federal estate taxes are
deductible against federal income tax). Total state tax is $50,000 on the $7 million estate, of which $20,000 is attributed to the IRA.
A more productive option might be to leave the retirement account to support The First Church of Christ, Scientist, and preserve all of the funds free from tax. It is simple to leave part or all of your IRA or other retirement account to the Church. Simply obtain a new beneficiary designation form from your plan administrator. Married donors will need their spouses’ written consent.
Options for Arranging Bequests from Retirement Plans
Beneficiary Change. Instruct the custodian or trustee of the retirement account to name the Church as partial or 100% death beneficiary. The custodian can provide the appropriate forms. As discussed below, the account can be left partially to benefit the Church, with the rest passing to a spouse or family members.
Will or Living Trust. If no death beneficiary is named for an account, a will or living trust can provide that retirement assets are specifically designated to pass to the Church (or as part of the “residue” of your estate if we are the sole residuary beneficiary).
Trusts for Children and Others. You can change the beneficiary of your retirement account to a charitable remainder trust that will benefit both a child or other family members and the Church. This may be especially helpful if your IRA will make payments to a group that includes one or more older beneficiaries. IRA rules state that funds must be completely distributed over the life expectancy of the oldest beneficiary. Tax and financial benefits will be better if payments can be stretched out and paid over the term of the charitable remainder trust – for 10, 15 or 20 years, rather than for life.
Charitable Gift Annuity. The IRS has approved a plan by which a donor left the balance remaining in her IRA to a charity to fund a charitable gift annuity for a family member. The value of the IRA would be included in the donor’s gross estate, but there would be an estate tax charitable deduction equal to the value of the IRA, less the value of the annuity. Neither the donor’s estate nor the charity would owe income tax on the IRA, but the income recipients apparently would be taxed on all payments.
Qualified Disclaimer. Members and friends may also consider making the Church a contingent beneficiary of retirement plan death benefits and giving heirs the right to disclaim (decline) part or all of their benefits. Heirs who understand the severity of taxes may decide it best to have retirement assets pass to the Church. A spouse may disclaim and have the IRA pass to a charitable remainder trust of which he or she is the lifetime income beneficiary.
Sharing with Family Members. Heirs may not need the shrunken amount that would be left from retirement assets after taxes. However, friends can make bequests of retirement accounts and purchase life insurance to replace what a family member would have kept, after taxes. Some donors prefer to leave a percentage of their IRAs to The First Church of Christ, Scientist and divide the rest among other beneficiaries. Or you can arrange for retirement death benefits to pass to a charitable remainder trust that would pay income for life or, alternatively, for a term of up to 20 years to family beneficiaries, with eventual benefit for our future.
Providing for Both a Surviving Spouse and the Church. Donors who wish to use a retirement account to benefit both a spouse and the Church have several choices:
- Make the Church a partial beneficiary of the account and leave the rest to the spouse, who could then roll over the benefits into his or her own IRA or receive distributions over his or her life expectancy under the general stretch-out rules for inherited accounts. Because the surviving spouse is not the sole beneficiary, life expectancy can’t be recalculated annually.
- Leave part or all of the retirement account to a testamentary charitable remainder trust in which the spouse is the sole beneficiary (required for qualification for the estate tax marital deduction);
- Set up a charitable remainder unitrust now for you and your spouse and fund the trust initially with cash or stocks. You could make your IRA or other retirement account payable at death to the unitrust, providing security for your surviving spouse and completely avoiding federal estate taxes. Alternatively, you could simply establish a charitable remainder trust for your spouse in your will, as noted above, and change your IRA beneficiary designation to the trust.
- Ideally, where both spouses choose to provide for the Church, the surviving spouse would be made the sole beneficiary of the IRA, with the expectation that he or she would leave part or all of the rollover IRA to The First Church of Christ, Scientist. Of course, the first spouse to die would have no absolute certainty that the Church eventually will benefit under this reliable spouse strategy.
Strategies for Roth IRA Conversions
Effective January 1, 2010, all taxpayers – regardless of income – became eligible to convert traditional IRAs to tax-free Roth IRAs, guaranteeing that future withdrawals would be free of income tax, both for themselves and their heirs. The downside is that converted amounts generally constitute taxable income.
Deciding whether to convert from a traditional IRA to a Roth IRA can be complex. Will you be in a higher or lower tax bracket in future years? Will your heirs’ tax brackets be lower than your own top rates?
All of these murky questions could be swept aside if it were possible to minimize the taxes resulting from a Roth conversion. In fact, there may be a simple solution: If your estate plan contains large charitable bequests, you could “accelerate” those bequests into current gifts, and use the charitable deduction to reduce or avoid income taxes.
Donors also might bunch four or five years’ worth of annual gifts into the year of a Roth IRA conversion, or prepay multi-year charitable pledges. Charitable remainder trust beneficiaries who feel they no longer need their annual payments can secure large deductions by assigning income interests to charitable remaindermen.
What if donors feel they don’t have the cash flow to accelerate charitable bequests? One strategy would be to deed part or all of a primary residence, vacation home or farm property to The Mother Church, while reserving a life estate. Charitable deductions are currently high for such arrangements, due to low interest rates used in calculating deductions.
Another possibility is to make a gift that provides a large deduction and lifetime income as well, through a charitable gift annuity or charitable remainder trust. Donors can enlarge these deductions by postponing the initial payment from a gift annuity for several years.
Here is an example:
Judith, age 55, is executing a Roth IRA conversion and needs to increase her itemized deductions. She decides to transfer $100,000 in securities to The Mother Church, in exchange for a charitable gift annuity that will initiate payments when she turns 67. Age 67, however, is merely an estimate of when she might retire, and Judith would have the option to start payments later or earlier, depending on circumstances.
Judith can deduct roughly $45,000 this year as a charitable gift and will receive payments of $7,300 (7.3%) at age 67. But if she decides to continue working past age 67, or for any reason wishes to postpone the start of annuity payments, her payout will increase. She could elect to get her first check at age 70 and be paid 8.5%, or receive 9.7% by starting at age 72.
If Judith found it desirable to start her annuity before age 67, she could do so at a reduced payout rate. Her charitable deduction, which smooths the path to her Roth IRA conversion, is unaffected by her choice of when she initiates payments.
Note: IRA owners who converted to Roth IRAs in 2010 generally elected to have the tax spread over 2011 and 2012. All the above gift techniques would be helpful in 2012.
Making The First Church of Christ, Scientist the beneficiary of a retirement account is essentially a matter of completing a beneficiary form provided by your account manager. If you are interested in providing for the Church through your retirement plan, please e-mail, call or write our office.
We are pleased to advise you:
- Our correct legal name, for use in filling out the beneficiary designation, and other information that may be required by your plan administrator in order to complete the beneficiary designation
- Suggested language to fit any special needs or circumstances
You will need to share with us:
- The type of retirement plan in which you participate: 401(k) plan, 403(b) plan, Individual Retirement Account, etc.
- Whether you are currently married (except for IRAs, a spousal waiver will be required)
- The amount you intend to leave to the Church
- Your desire to learn more about the possibility of reserving lifetime income from this gift, to benefit a family member or loved one
- Any pertinent contact information, including address and telephone, of the manager of your retirement account
You can contact our office at email@example.com, by phone at 1-800-288-7155, extension 3288, or write to us at the address below. We look forward to hearing from you.The First Church of Christ, Scientist
210 Massachusetts Avenue
Boston, MA 02115-3195 USA