Legacy Foundation, Lake County’s Community Foundation, offers donors a number of giving options to help them meet their charitable goals. The easiest is through a bequest or, simply put, a will. But, there are a couple of central questions the donor needs to answer, including, “What assets should I leave?”
Recently I met with a Lake County donor I will call Ed. Ed was planning to leave a bequest to Legacy Foundation through his will. He was interested in fostering programs that benefit his neighborhood but also educational programs that teach children about protection of our environment.
Ed wanted to make an initial gift before his death so he could see his charitable dollars at work while he was still living. So with an initial contribution Ed made that day, we established a permanent fund in his name. He designated several not-for-profits he wanted to support which would receive annual distributions from the fund during his lifetime.
Separately, in conversations with his attorney, Ed has directed in his will that upon his death whatever is remaining in his IRA will come directly to his fund at Legacy.Those same programs he designated for support during his lifetime will receive perpetual support long after he is gone.
What are the benefits of Ed’s decision?
First, Ed will receive a charitable tax donation for his initial gift and see his gift in action. However, just as importantly, bequests from IRAs and qualified retirement plans represent a donor’s charitable gift asset with the best tax advantage. The full value of IRAs (and other qualified retirement plans) is subject to state and/or federal estate taxes. These taxes, which can go as high as 40 percent, will be due when distributions to individual heirs are taken and calculated into the estate’s income.
By gifting the assets in an IRA or a qualified retirement plan to a charity, the estate avoids creating a tax liability for the family members or other individual beneficiaries. Legacy Foundation and other community foundations do not pay income taxes and keep every dollar donated directly from an IRA bequest. That means contributions will not be reduced by taxes and will be available for causes the donor wants to support.
Ed will continue to receive his annual distribution from his IRA during his lifetime. Naming his fund at Legacy Foundation as the beneficiary of his IRA will not affect the required amount he will receive when he is 70 1/2 years old. Once he passes away, whatever amount is remaining in his IRA will be directed to the fund he established while he was still living.
An important point is that his will specifically directs his fund at Legacy Foundation to receive the assets in his IRA. By doing so his estate will qualify for a charitable tax deduction, and other assets he owns can be distributed to his heirs without this significant tax implication.