SO YOU WANT TO BE A PHILANTHROPIST?
When balancing financial goals for retirement, charitable giving, and what is left to heirs, an Individual Retirement Account is normally set aside to provide additional retirement income and benefit heirs. But in many cases, money managers suggest a different strategy that makes more efficient use of funds by reducing taxes.
A couple, or often a remaining spouse, may have more than he or she could need in an IRA. This is money that was saved and saved but other retirement income and pensions have provided enough. With a simple swap strategy, an IRA can provide a gift for charity instead of other already tax-free funds, reducing the children’s or grandchildren’s estate taxes. Why give it to the government? It can be done by changing the beneficiary of an IRA as a charitable bequest.
“They receive more tax-free than they otherwise would if they received all of their inheritance from the IRA,” said Chris A. Gair, executive vice president and senior trust officer for Investors’ Security Trust in Fort Myers. “The beauty of leaving an IRA to charity is that it’s tax-free forever.”
This strategy generally only works with a traditional IRA since funds in a Roth IRA, for instance, have already been taxed.
Donors who itemize their tax returns and are older than 70 may also be able to start giving now out of an IRA fund to yield greater tax savings strategies while helping charities. Called a charitable rollover, the gift through an IRA doesn’t appear on your income tax return as income. The IRS has allowed this for the last several years. One problem, though, is that Congress has not made that a permanent possibility. Congress is set to decide yes or no during the last weeks of the year.
“We just scramble if we’re allowed to,” Mr. Gair said, adding that it would benefit everyone if Congress would make up its mind on this type of charitable rollover. “It’s a real source of frustration for us.”
The Southwest Florida Community Foundation is a community trust set up to direct funds toward the charitable organization a donor has in mind. The foundation then invests the funds in perpetuity. The donor tells the foundation how he or she wants the money to benefit community organizations. Philanthropy through IRAs is a sometimes overlooked strategy, said vice president of development and communications Carolyn Rogers.
“I’ve seen people do it for tax reasons and then become these committed philanthropists,” she said. “They see where they can take care of things they care about.”
With children and charity to consider, money is left to one at the expense of another, so there is the question of balancing those intents. Especially in this case, estate planning for such charitable bequests through an IRA is best done with a CPA, attorney, and trust company that manages the money working as a team, Mr. Gair suggested. An attorney can help with a spousal waiver, for instance, since an IRA normally benefits the surviving spouse. And there are numerous ways funds from an IRA can be divided up, whether donating it in full to a single charity, benefiting a private family foundation or broad areas such as animal welfare, healthcare for Florida children, or preservation of lands.
For those who intend to donate to charity and have no heirs, using the IRA is a no-brainer, Mr. Gair said – the most efficient way to get dollars to a charity. In two cases this year, his clients did just that. One grew up on a Florida Sheriff’s Youth Ranch and felt he owed his success to them. Married with no children, after his wife passed away he gave 100 percent of an IRA to the organization.
“It is the most tax efficient way in estate planning to get dollars to a charity,” Mr. Gair said.