We all know that regular IRAs (as well as any qualified retirement account) hold “pre-tax” funds. This means that income taxes have not been assessed to these funds or any subsequent investment growth in the account. Either you pay income tax on funds withdrawn while you are alive or someone (your estate, spouse or heir) pays income tax on every penny after you are gone. The only real way out of paying those income taxes (sometimes on a lifetime of non-taxed appreciation) is through designating a charitable entity as a beneficiary of your IRA or qualified retirement plan.
These funds are the most taxes funds in anyone’s estate – even those not near Federal Estate Tax levels – and could see upwards of 70% or more depletion to taxes under the worst scenarios.
Best of all, all you need to do is change your beneficiary designation form to include one or more charitable entities to receive a portion or all of these funds upon your passing. If you need the funds while you are alive, you use them. And, the government makes you take something out every year, in any case, once you reach age 70 1/2, so called RMDs (Required Minimum Distributions).
Sounds easy. No lawyer needed (of course, we strongly recommend seeking advice of counsel on all planning issues like this). Just fill out the form and submit it. Sounds almost too easy.
Well, if you are a fundraiser involved in encouraging planned gifts like this, read this carefully. There are two big obstacles to making sure these gifts happen (as I see it):
- Does IRA custodian have the beneficiary designation form? This has been a problem for IRAs since their inception. No form on file, funds go to estate not your organization. If your donor tells you he is doing this, you have to find a way to confirm that the form was filed out correctly and is on file, if possible. I say “if possible” because it is a tricky matter asking donors for “proof” like this. My suggestion is to initially recognize the gift, put them into the legacy society, and later (maybe in a year) tell them that you are documenting everyone’s intent and ask if it is possible for them to print out something from the IRA custodian confirming their designation.
- Don’t lose track of these donors! I know for a fact that insurance companies as a policy do not tell beneficiaries that there is money for them – it is up the the beneficiary to claim it. I believe insurance companies are sitting on billions of unclaimed funds – even though they know who the beneficiaries are and even where to find them. But, I never expected this from IRA custodians until a client told me that they went through it and the well known IRA custodian told them it was their policy to wait for beneficiaries to claim IRA proceeds. I don’t think this is the industry norm but it wouldn’t surprise me if it becomes so. SO, keep track of your IRA beneficiary designation donors, like you should do with your insurance policy donors.
Ok, not so difficult but not as easy as advertised.