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Tax Effective Charitable Giving Strategies: Charitable Gifting with Retirement Accounts

In our ongoing review of tax effective charitable giving strategies, this article will discuss charitable giving with retirement accounts. Over 50% of households in the U.S. have ownership in at least one retirement account and retirement assets in the U.S. exceeds $28 trillion dollars. Retirement accounts are often seen as an easy way to save and invest, especially since many people are eligible to participate in retirement plan benefits through their employer. Contributions to most retirement plans, such as 401(k), 403(b), TSP, traditional IRAs, SEP, SIMPLEs, etc., are made with pre-tax dollars and grow tax free. The funds are then subject to an ordinary income tax rate at the time of withdrawal.

Historically, leaving your retirement account to a designated beneficiary allowed the beneficiary to gradually withdraw the taxable account assets over many years, allowing them to continue to receive the benefits of tax-free growth and related tax deferral. The designated beneficiary had the option to defer, or stretch, retirement plan withdrawals over the expected lifetime of the beneficiary. Depending on the age of the beneficiary, the annual payouts could stretch out over many decades.

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However, with the passage of the SECURE Act in December 2019, continued deferral of retirement plan withdrawals is now only available for a few classes of beneficiaries, including a surviving spouse, a person who is either chronically ill or who has a disability, any child under the age of 18, or a beneficiary who is not 10 years younger than the account owner. All other beneficiaries are required to withdraw the balance of tax deferred retirement accounts no later than 10 years following the death of the original retirement account owner.

This significant change makes preserving retirement accounts for future generations less tax advantageous. Those who are charitably inclined should reconsider charitable gifting of qualified retirement funds. For taxpayers with charitable intentions there are several methods of gifting through retirement plans, which may accomplish their desired objectives.

The first charitable gifting option is a Qualified Charitable Distribution. At age 72, an individual is required to take required minimum distributions (RMDs) from their qualified retirement account(s). RMDs are subject to ordinary income rules and thus many taxpayers are loathe to take these distributions if they do not need the income.

Instead of taking an RMD, the retirement account owner can make a Qualified Charitable Distribution (QCD), which is a distribution directly from the retirement account to a qualified charitable organization (a qualified charitable distribution does not apply to contributions made to private foundations, supporting organizations, donor advised funds or to split interest trusts.) QCDs are limited to $100,000 per taxpayer, per year, and the distribution is not included in the taxpayer’s income for the year. Likewise, the taxpayer is not entitled to a charitable deduction for the year, however, the net effect of a QCD is no effect on taxable income.

Another option is to consider leaving retirement plan assets to a charity as a beneficiary of a qualified retirement plan. When the charity is named as the beneficiary on a beneficiary designation form, at the account owner’s death, the benefits are paid directly to the charity and income tax on the distribution is avoided. Neither the taxpayer’s estate nor their beneficiaries will report the retirement funds as income on their tax return. The charity also pays no income tax. This increases the monetary benefit to charity and can reduce the tax paid by non-charitable beneficiaries than if assets rather than qualified funds or contributed to charities.

For high-net-worth taxpayers who are subject to the estate tax (currently those with an estate that exceeds $11.7 million), qualified retirement funds are potentially subject to double taxation. They are subject to the estate tax and the beneficiary will pay ordinary income tax on the retirement account funds received. However, if a charity is named as a direct beneficiary, income tax is avoided, and the estate receives a charitable deduction on the estate tax return.

For these reasons and more, retirement accounts increasingly have become the resource of choice for individuals who wish to benefit important organizations, either at death, during life or both. If you have questions regarding how to incorporate charitable gifting into your estate plan, call and schedule a consultation with one of our attorneys.


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Client: Am I required to leave assets to my children equally in my will?

Ms. Snead: No. In Virginia, you can generally leave your assets to anyone you wish. The only person that you cannot disinherit without restrictions is your surviving spouse.


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