Estate planning is typically a time for introspection. What have I built during my life, both personally and financially? What type of legacy do I want to leave?
As such, planning your estate is the ideal time to consider your philanthropic goals. Once you establish your goals, you can then work with a planner to determine the most financially savvy and expeditious avenue to accomplish those goals.
Many people are finding they have accumulated a large percentage of their wealth through qualified plan assets such as IRA’s. Since the amount accumulated in an IRA has never been subject to income tax, individuals must give careful consideration to the income tax consequences for planning with IRA’s. When considering a death-time charitable gift, a charity is an ideal beneficiary to the IRA assets. Because a charity does not pay income tax, the charity will receive the entire amount of an IRA bequest. In contrast, if an individual is the beneficiary of an IRA, the individual will include any distribution from the IRA in their adjusted gross income. Careful consideration must also be given in drafting the beneficiary designation. When leaving IRA money to a charity it is best to designate the charity directly on the beneficiary designation form. Problems can arise if the beneficiary designation is a trust even if that trust ultimately provides for a distribution to the charity.
Furthermore, the IRA is very useful for lifetime charitable donations as well. Starting in 2016 Congress made the law permanent that allows an individual to donate their required minimum distributions to a charity. The IRA owner can satisfy their RMD requirement and the distribution will not increase their adjusted gross income. Again, careful consideration and planning must take place so that the distribution goes directly from the IRA fund to the charity. The individual should contact their IRA administrator as well as the charity to coordinate the donation directly from the IRA to the charity.
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