IRAs AS A CHARITABLE ASSET
Traditional IRAs and other qualified plans usually make up a large portion of our client’s net worth. These assets have never been subject to income tax and, when taken by our client through required minimum distributions during life or by the IRA beneficiaries after our client’s death, will be subject to ordinary income tax. To avoid this income tax burden, if a client wants to provide a charity $500,000 at death, the client should direct IRA assets to the charity since the charity does not pay income tax on the IRA proceeds. The client can then give more tax efficient assets to non-charitable beneficiaries.
The Secure Act passage in 2020 has, for the most part, eliminated the ability of non-charitable beneficiaries to stretch the deferral of ordinary income over the beneficiaries’ remaining life expectancy. Most of these beneficiaries are now limited to a maximum 10-year deferral at which time the full amount of the IRA would be subject to ordinary income tax to the beneficiary.
Some clients are choosing to implement a testamentary Charitable Remainder Trust (discussed above) and designate the Charitable Remainder Trust as the beneficiary of some or all of their IRA to try and replace the stretch IRA eliminated by the Secure Act. The clients’ child is designated as the income beneficiary of the Charitable Remainder Trust for the remainder of the child’s lifetime. This accomplishes two objectives – it fulfills a charitable intent of the client and stretches the income from the IRA over the child’s remaining life.
In conclusion, a client has many options with regard to charitable giving. Structuring their charitable plan to meet their objectives and provide the best tax consequences must always involve analysis under current law and interest rates, with awareness of potential law changes.
