Over the last few months, many advisors have noticed an uptick in client inquiries about leaving their IRAs and other retirement plans to charity. If you are wondering why, it likely has much to do with the buzz surrounding Qualified Charitable Distributions (QCDs). QCDs allow those who have reached the age of 70.5 to direct up to $100,000 annually to qualified charities such as Designated Funds or Field-of-Interest Funds at KZCF. This approach avoids the need for an income tax hit and Required Minimum Distribution (RMD) if the client is 73.
We acknowledge that it may be more than just the QCD that has spurred your clients to ask questions. Beyond the fact that charitable planning with IRAs and other qualified retirement plans is a popular topic in financial publications and mainstream media (see articles like “Win an Income-Tax Trifecta With Charitable Donations,” published last year by the Wall Street Journal), there are some other things to consider.
Tax Efficient Results
When your client names a public charity, such as a Donor Advised Fund or another fund at KZCF, as the beneficiary of a traditional IRA or qualified employer retirement plan, your client achieves extremely tax-efficient results. Clients can gain tax benefits over time by contributing money to a traditional IRA or an employer-sponsored plan. That is because contributions to specific retirement plans are what the IRS considers “pre-taxed.” This means your client does not pay income tax on the money used to make those contributions, subject to annual limits.
Assets in IRAs and qualified retirement plans grow tax-free inside the plan. In other words, the client is not paying taxes on the income generated by those assets before distributions start in retirement years. This allows these accounts to grow rapidly.
No Income Taxes
When a client leaves a traditional IRA or qualified plan to a fund at KZCF or another charity upon death, the entity does not pay income taxes (or estate taxes) on those assets. By contrast, if the client were to name children as beneficiaries of an IRA, those IRA distributions to their heirs would be subject to income tax. These taxes can be quite hefty, given the tax treatment of inherited IRAs.
So, if your client is deciding how to relinquish stock and an IRA as part of their estate plan, leaving the IRA to charity and the stock to children is a no-brainer. Remember, stock owned outside of an IRA gets the “step-up in basis” when the client dies. This means the beneficiaries will not pay capital gains taxes on the pre-death appreciation of that asset when they sell it.
Traditional IRAs are often poor vehicles for clients to establish a family legacy. If a client is inclined to participate in charitable pursuits, traditional IRAs are likely better invested posthumously in philanthropy if other assets, such as appreciated stock, can be left to beneficiaries.
KZCF is always happy to work with you to ensure your clients maximize their assets to fulfill their charitable giving goals.