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Retirement Planning > Retirement Investing

Using Retirement Plan Funds For Charitable Giving

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As financial advisors, we have the opportunity to work with clients who care about the ongoing support of philanthropic endeavors. Incorporating a client’s philanthropy into an estate plan is often an important extension of lifetime giving.

While potential tax savings continue to be an important motivating factor, individuals place equal, if not greater, weight on exploring how they can use their wealth to add meaning and satisfaction to their lives, and how they can shape the values they wish to instill in their children.

Using funds from a retirement plan may be a good option for clients to achieve two goals: exercising social responsibility through support of one or more nonprofit organizations and obtaining tax benefits that will help preserve their wealth.

Two factors make this category of assets ideal for making a charitable donation: (1) The funds are often available because retirees find they do not have to rely on these retirement assets for income (or, if they do, not to the extent they had planned); and (2) when clients pass on, without proper planning, retirement plan balances may be subject to combined income and estate taxes in excess of 50% (generation-skipping transfer taxes could add even more), making the government the de facto primary beneficiary of these assets.

Under current law, the federal estate and generation-skipping transfer taxes phase out through 2009, are repealed for one year in 2010 and are reinstated in 2011.

To minimize taxes and support a socially conscious organization of their choice, clients have several options for designating a charity as a beneficiary of their retirement plan assets without negatively impacting their heirs. Depending on how the charitable gift is structured, the charitable beneficiary(ies) designated will receive funds either at the client’s death or at the death of the survivor of the client and his or her spouse, depending on the financial needs of the survivor.

This strategy does not give heirs a greater share of the retirement assets; rather, it shifts a portion of the assets from the government to charity. This charitable bequest can be made, among other ways, directly to a public charity or private foundation, or, on a deferred basis, through using a charitable remaindertrust (CRT).

When determining which charitable vehicle is appropriate, it is important to discuss with clients their desire to control the funds, involve family members in charitable giving and provide annual cash flow to beneficiaries.

A direct bequest to a private foundation or public charity may be appropriate. Family participation in the foundation can cultivate a shared interest in philanthropy and foster a prudent use of individual family members’ resources for a similar purpose.

A private foundation is a not-for-profit charitable entity–a trust or corporation, depending on state law–that can be established during the client’s lifetime or upon his or her death. By stipulating that a foundation be created with a charitable purpose and by specifying parameters for distribution in a last will and testament, the client can create a legacy of charitable giving.

In addition, the client’s will would appoint the board member or trustees, some or all of whom could be the client’s family member(s). Under certain circumstances, the board member and trustees can receive compensation for their services. This is often important for involving family in the long-term endeavors of the foundation.

The IRS carefully monitors the activities of private foundations. A yearly excise tax on net investment income is charged. In addition, foundations must distribute to charitable organizations at least 5% of the average annual market value of their assets annually.

Severe penalties may be imposed if the foundation engages in acts of self-dealing, fails to distribute the minimum distribution amount, has excess business holdings, invests in assets that jeopardize the foundation’s charitable purpose or makes improper expenditures. It is important to understand these rules when working with clients who have or intend to establish a private foundation.

Many donors choose to set up a CRT to receive current (or deferred) cash flow without generating immediate capital gains tax. A CRT created through a last will and testament (testamentary CRT) can be the recipient of qualified retirement plan assets.

The terms of the testamentary CRT designate an individual or individuals as income beneficiary(ies) and a charity as a remainder beneficiary to which the assets would be distributed at the termination of the trust. The termination date can be set at the death of the income beneficiary or beneficiaries or for a period up to 20 years.

The receipt of the retirement assets by the testamentary CRT generally does not generate immediate income taxes. However, unless the only income beneficiary is the client’s spouse, the present value of the income interest is subject to estate tax, which cannot be paid from the assets of the testamentary CRT.

The designation of public charities, private foundations and CRTs as the beneficiaries of retirement plan assets provides clients with an alternative to effectively making the government the primary beneficiary of these assets.

Incorporating the charitable disposition of retirement plan assets in clients’ estate planning will generally increase the magnitude of their charitable giving and help ensure that the causes they care about will continue to be addressed through the work of the organization they choose to continue to help fund.

Stephanie Sherman is a financial planner at Family Wealth Management Group, LLC, East Hanover, N.J. You can e-mail her at [email protected].


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