If you are interested in financial planning – as I am always encouraging fundraisers to get into – this story by Deborah Jacobs (a Forbes writer) is a small one that could end up being very important for the nonprofit world:
Assuming you have read the article, here is my take on it and a story:
Back in 1998, on one of my first planned giving expeditions, my boss gave me the topic of IRA tax depletion to discuss in front of a regional board at the nonprofit I worked at. Very excited, I had some easy facts at my disposal – adding up income and estate tax rates to prove that people were downright crazy not to leave their entire IRAs to charity (to avoid upwards of 80% tax depletion).
And, I learned one of my first lessons in this field the hard way – know the full story before getting up in front of a group. Sure enough, a few seconds into my presentation, a lawyer in the room quickly dismissed my hypothesis. In short, he said the Stretch IRA method made my exaggerated claims of tax depletion for the most part irrelevant to those with heirs.
And, you know what? He was right. Stretching out IRAs over generations makes a lot of sense for family wealth transfers.
That is, until this proposed legislation gets enacted. If it happens, I will finally be able to say with complete confidence that leaving your IRA to a charity (after spouses are taken care of) is the best planning option for IRAs – without worrying about the spoil sport lawyer in the room.
Thanks, Jonathan. A frank admission to an error that I also made, with a timely alert that we may be correct after all, through no fault of our own. Jackie Jacobs
Jackie,
Thank you for commenting! If this one passes, IRA beneficiary designations should finally take their rightful place as a prime planned giving method. Always good to hear from you!
The late, great John Brown always used the 80% figure when encouraging seminar attendees to consider leaving IRA assets to charity. Only once in the dozens of times he presented did an attendee challenge this, so I suspect many “average” IRA owners do not know about the “stretch” technique. Moreover, wearing my hat as a fundraiser for a charity, I think IRAs are a great asset to give regardless and in most cases donors to my charity do not have natural heirs to give them to in any case. I have encouraged my own parents to use their modest IRAs to make charitable bequests.
Let’s remember that even with a “stretch” IRA, the required distributions albeit over many more years are taxed annually at ordinary income rates; and distributions may adjust upwards as the IRA asset grow (tax-deferred). So even in the IRS does not get its combined taxes earlier, it still will recover the revenues at ordinary rates (and, ultimately, it may also get some estate/income tax combination in one sum when the “stretch” beneficiary dies). So as we tend to tell audiences who will listen, an IRA (the generic term for an qualified plan), no matter how distributions are taken and taxed, was never intended to be a “free lunch.” Nice post, Jonathan.