Using Qualified Plans And IRAs In Charitable Giving
Charitable giving can play a unique and valuable role in an estate or financial plan while making a lasting impact on a charitable organization. There is a broad array of charitable giving techniques which can be matched to the particulars of an individuals circumstances, objectives and preferences.
Charitable planning can be initiated either during lifetime, or upon death through testamentary planning. In addition, charitable contributions can be accomplished through outright transfers or with “split interest” arrangements such as a Charitable Remainder Trust (or “CRT”), which benefits both charitable and non-charitable beneficiariesincluding the donor, spouse or others.
A CRT is a special type of tax-exempt irrevocable trust which serves both charitable and non-charitable purposes. It is a split interest trust which is designed to benefit the donor or someone else the donor chooses for a period of time, followed by the charity or charities of choice. During the trust term, the term (or income) beneficiary receives an annual payout from the trust equal to a fixed percentage of the value of the trust property. The payout can be based on the initial value of the trust contribution using a Charitable Remainder Annuity Trust (“CRAT”), or the changing value of the trust property using a Charitable Remainder Unitrust (“CRUT”). Then at the end of the trust termfollowing the income beneficiarys death (or a specified term of years)the trust property (or remainder interest) passes to the named charity or charities. The charitable remainder beneficiary can be either a public charity or a private foundation created and managed by the donor and family.
Consequently, the appeal of a CRT is that it permits the donor (or someone else) to receive income from property transferred to the trust while providing for a deferred gift or bequest to the charity of choice, and affording many tax and non-tax benefits. CRT planning can be initiated either during an individuals lifetime (intervivos CRT) or upon death (testamentary CRT).
Tax Treatment of Qualified Assets Upon Death. Consider the tax treatment of IRAs and qualified retirement plans upon death. Perhaps more than any other asset comprising an individuals estate, these assets are likely to experience the most erosion upon death (or death of a surviving spouse), due to a combination of income and estate taxes.
If a surviving spouse is the plan beneficiary, an unlimited marital deduction may be available to postpone estate tax until second death. In addition, pursuant to a spousal rollover, income tax may be postponed. However, following the surviving spouses death, when the plan passes to non-spousal beneficiaries such as children or grandchildren, the plan balance may then incur significant estate tax, income tax or even GST transfer tax. The result is a diminished family legacyan asset eroded by taxes.
As a solution, consideration could be given to the benefits of naming a testamentary CRT the beneficiary of the IRA or qualified retirement plan upon the plan owners deathresulting in a more tax-efficient disposition of the plan, and providing an amplified legacy for family and charity.