Recently, you may have noticed an uptick in clients asking about leaving their IRAs and other retirement plans to a nonprofit organization. This likely has a lot to do with the buzz around Qualified Charitable Distributions (QCD), which allow those who’ve reached the age of 70½ to direct up to $100,000 annually to qualified charities – including Designated Funds or Field of Interest Funds at the Omaha Community Foundation – avoiding both the need for a Required Minimum Distribution (if the donor has reached age 73) and the income tax hit.
It’s probably more than just the QCD, though, that has spurred your clients to ask questions. More and more, charitable planning with IRAs and other qualified retirement plans is a topic in financial and mainstream media. A case in point is a September 2022 article in the Wall Street Journal, irresistibly titled “Win an Income-Tax Trifecta With Charitable Donations.”
When your client names a public charity, such as a qualified fund at the Omaha Community Foundation, as the beneficiary of a traditional IRA, your client achieves extremely tax-efficient results. Here’s why:
- First, the client achieved tax benefits over time as they contributed money to a traditional IRA. That’s because contributions to certain retirement plans are what the IRS considers pre-tax; your client does not pay income tax on the money used to make those contributions, subject to annual limits.
- Second, assets in IRAs grow tax free inside the plan. In other words, the client is not paying taxes on the income generated by those assets before distributions start in retirement years. This allows these accounts to grow rapidly.
- Third, when a client leaves a traditional IRA to a fund at the Omaha Community Foundation or another nonprofit upon death, the organization does not pay income or estate taxes on those assets. By contrast, if your client were to name children as beneficiaries of an IRA, for example, the IRA distributions to the children would be subject to income tax, and that tax can be hefty given the tax treatment of inherited IRAs.
So, if your client is deciding how to efficiently transfer appreciated stock or an IRA in the client’s estate plan, intending to leave one to children and the other to charity, leaving the IRA to charity and the stock to children is often the best option. Remember, the client’s stock owned outside of an IRA gets the step-up in basis when the client dies, which means that the children won’t pay capital gains taxes on the pre-death appreciation of that asset when they sell it.
Here’s the net-net:
Traditional IRAs are often poor vehicles for your clients to use to leave a family legacy. Instead, if a client is charitably minded, traditional IRAs are likely better deployed to posthumous philanthropy if other assets, such as appreciated stock, are available to leave to children and other heirs.
The Omaha Community Foundation is always happy to work with you to ensure that your clients are maximizing their assets to fulfill their charitable giving goals.