Estate planners have for years recommended that retirement assets may be the most tax-effective asset in larger estates to distribute to charity.  These assets are not only vulnerable to heavy taxation as part of an estate but also can be taxed again as income in respect to a descendent on the tax returns of heirs.

Until now, there was no incentive to give IRA’s to charity during their lifetime because withdrawals from IRA’s were subject to income tax – even those given to charity.

As of January 1, 2006, retirement assets may become a preferred charitable gift for seniors.  IRA distributions to charity can now receive new tax advantages.  Americans age 70 ½ and up can make tax-free IRA contributions to public charities such as your community foundation.  The Pension Protection Act of 2006 permits individuals to transfer up to $100,000 from individual retirement accounts directly to a qualifying charity without recognizing the assets transferred as income for federal tax purposes.  Consult your tax advisor for additional details.

What are the advantages of this new law?

The tax benefits now available to American seniors will encourage new contributions from individuals who will no longer have to pay tax on a charitable gift of IRA funds.  When given trough a community foundation, these contributions can support all aspects of community well-being; arts and culture, economic development, education, environment, health and human services and more.

How can an IRA gift be made? 

IRAs are typically held by a financial service or trust company.  These custodians will likely provide a form that could be used to transfer the IRA directly to the foundation, with no tax incurred.

The information provided above is based on continuing analysis of the Pension Protection Act of 2006.  Every effort has been made to ensure accuracy of the answers to these questions.  However, due to the complexity of the bill and the fact that many of these provisions introduce issues that are new to the Internal Revenue Code, this information may be subject to change.  It is not a substitute for expert legal, tax or other professional counsel and we strongly encourage donors to work with their professional advisors to determine the impact of this legislation on their particular situations.

Charitable Instruments

Charitable Gift Annuity

Giving through a Charitable Gift Annuity allows you to arrange a generous gift to your community, while providing yourself a new income source you can count on for the rest of your life.  A charitable gift annuity is a way for you to receive a guaranteed income for life and an immediate income tax deduction, while at the same time, leaving a legacy to the charitable cause of your choice.

Through a charitable gift annuity, you receive a fixed stream of income for life.  After paying the lifetime annuity to you and your spouse, the remaining principal is transferred to your named charitable fund to accomplish your specific charitable goals.  Our payments to you are based on your age; the older you are, the higher the rate.  If the annuity is for you and your spouse, the calculation is based on your joint ages.

Charitable Remainder Trust

Giving through a Charitable Remainder Trust allows you to receive income for the rest of your life, knowing that whatever remains will benefit your community.

You transfer assets into a trust, and the trust pays you or a beneficiary you designate regular income payments.  Upon the beneficiary’s death or after a defined period of years, the remaining assets in the trust transfer to the community foundation to support your individual or personal charitable giving goals.

Charitable Lead Trust

A Charitable Lead Trust helps you build a charitable fund with the community foundation during the trust’s term.  When the trust terminates, the remaining assets are transferred to you or your heirs, often with significant transfer-tax savings.

You transfer assets into a trust, which pays the community foundation an annual amount to build a charitable fund.  During its term, the trust can be managed expertly by experienced trust professionals, which may help your trust investments grow over time.

A Charitable Lead Trust entitles you to a number of financial benefits.  It shelters investment earnings from tax, and it offers gift, estate, and generation-skipping tax benefits.  For example, trust assets are removed from your estate for estate tax purposes.

Bequest by Will

Including a charitable bequest in your will is a simple way to make a lasting gift to your community.  When you make this gift through the community foundation, we establish a special fund that benefits the community forever and becomes your personal legacy of giving.

You can decide to do it at any age by adding to an existing will or drafting a new one.  In doing so you leave a legacy to your community, while enjoying the assets you need to maintain your current lifestyle.  Plus, you are able to distribute some or all of your assets, tax free.

Some of the most tax-efficient asset types to give through your will come from retirement plan accounts, since heirs would be taxed on the income in respect of the descendent.  You can choose to give a stated dollar amount, a specific property, a percentage of your estate, the remainder after distributions to other beneficiaries or you can make your gift contingent on certain events.

As these giving vehicles are complex and related to other estate planning, we encourage you to work with your lawyer or financial advisor.  If you have questions about life income plans that have not been answered in this section, please click here to read our Gift Acceptance Policy.

Contact Kim Harmon for more information kimh@hccfindiana.org.