Using Retirement Plan Benefits In Charitable Giving
As we all know, retirement assets constitute a significant portion of the net worth of many of our clients. And with the recent increases in contribution limits to retirement accounts authorized by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), this trend no doubt will continue, and likely will increase.
Thus, regardless of our varying focuses as professional advisors, we must be able to counsel our clients regarding the taxation of, and planning opportunities available with, retirement benefits.
This article reviews the taxation of retirement benefits (see sidebar), discusses charitable planning with retirement benefits, and addresses the potential use of life insurance in connection with such planning.
Structuring the Charitable Transfer of Retirement Benefits.
Two basic methods exist by which retirement assets can be transferred to charitylifetime transfer and testamentary transfer.
Lifetime transfers. With respect to a lifetime transfer of retirement assets, the account itself may not be given to charity; instead, the account owner first must take a distribution of the assets, pay any applicable income taxes and penalties, and then may contribute the net amount to the intended charitable organization.
If the account owner itemizes deductions, then he would be entitled to an income tax charitable deduction for the gift (subject to the applicable percentage limitations). From an estate tax standpoint, such a gift would reduce the value of the account owners estate for estate tax purposes.
Testamentary transfers. While lifetime charitable gifts of retirement account distributions no doubt result in tax savings to the account owner and possibly his beneficiaries, testamentary transfers of retirement assets in many cases will yield more significant tax savings.
There are four key tax benefits to keep in mind when considering charitable planning with retirement benefits:
–Since neither a qualified charity nor a charitable trust is subject to income tax, the receipt of IRD by such an entity will avoid income tax otherwise payable by an individual or non-charitable trust beneficiary.
–The account owners estate would be entitled to a federal estate tax charitable deduction for amounts passing to a charitable beneficiary.
–IRD does not receive a step-up in basis for income tax purposes upon the account owners death.
–The retirement benefits will not be available to be “stretched-out” over the beneficiarys life expectancy, which could produce significant tax-deferred growth during such period (assuming the estate tax attributable to such benefits can be paid from a source other than the retirement account itself).
2001 Proposed Regulations. On Jan. 11, 2001, the IRS released proposed regulations that would make sweeping changes to the minimum distribution rules pertaining to retirement accounts.
The proposed regulations eliminate much of the complexity currently applicable to retirement account distributions by (1) making it easier for account owners to calculate the amount they must withdraw during life; and (2) delaying the determination of the accounts designated beneficiary until the end of the year following the year of the account owners death. Ultimately, the proposed regulations reduce the amount of required distributions for the majority of taxpayers.
The principal change found in the proposed regulations is a uniform table, which is to be used by all account owners when determining required minimum distributions. Distributions under the new table are based on the joint life expectancy of the account owner and a hypothetical person who is 10 years younger than the account owner. Required minimum distributions are determined without regard to the beneficiary’s actual age.
There is only one exception. If a spouse who is more than 10 years younger than the account owner is the beneficiary, then the actual joint life expectancies can be used. This would allow the account owner to slow down the rate of required distributions during lifetime.