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 Either you pay income tax on funds withdrawn while you are alive or someone (your estate, spouse or heir) pays income tax on every penny after you are gone.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.
I don’t see any of these as problems. These issues exist for all estate gifts. But, IRD assets are still the best assets to give from a tax perspective.
The problem of donors not properly filing beneficiary designation forms (or lost forms) is something estate attorneys have talked about for years but I haven’t deal with it personally. But, the issue of IRA custodians waiting for beneficiaries to claim their accounts took me by surprise – hopefully not the norm but you would be shocked at the name of the firm with the policy of not notifying beneficiaries that sparked the blog post.
I agree that it is the best asset from a tax perspective but fundraisers in particular need to pay some attention to these details.
I’ve had some occasions where I had to be very persistent with IRA administrators (as well as insurance companies and executors for estates) in order to get a distribution.
While I don’t doubt that there’s a policy (official or not) not to part with assets easily, it helps to demonstrate to such administrators that you are not going anywhere and that you wil persist in carrying out the donor’s wishes to support your organization.
Great discussion. I would like to add a third problem that I uncovered in a book by Ed Slott but never hear discussed. If both a charity and children are listed as beneficiaries, the IRS does not allow the people to utilize the normal “stretch” provision. The solution is to split the IRA into two separate IRAs, one for charities and one for people.
I also like to advise donors always to add the designation “per stirpes” after the name of their children. There are two benefits. You don’t disinherit one child’s children in case you and one child die simultaneously. Also, a wealthy child can disclaim the inheritance and let it pass directly to his/her children, possibly avoiding 39.6% tax and creating a great legacy for some of your grandchildren.
Great question about the potential problem of naming both charitable and non-charitable beneficiaries! I could not find an answer even though I thought that issue was fixed some time ago. Look for a follow-up blog post on this topic.
Funny we were discussing this very subject at the Master’s Forum at PPGGNY yesterday.
Vikki Jones, CFRE
thank you for helping me to do my job better! two excellent points; not obstacles, just diligence! this tracking is necessary for all planned gifts, i encourage my clients to do this through dababase mgt (not just a manual spreadsheet) that will survive beyond the comings-and-goings of MGOs/PGOs.
In my experience it is often the case that with married couples, unless an ILIT has been put in place, the charity is usually made the contingent beneficiary with the spouse understandably being primary. The challenge then, is to make sure that there is follow-through with the surviving spouse so that beneficiaries are named again when the IRA is inherited. Some spouses will want to honor the intent of their deceased spouse, while others may decide it is their right to name their own charities and that may or may not be the same one(s). With the frequent turnover of development staff it is entirely likely that a new staff member may not catch up to the need to be in touch with the surviving spouse to continue to steward the gift intention. Also makes the case for being involved with both spouses, and perhaps children, when charitiy is initially named as a beneficiary. Everyone needs to understand the donative intent.