Considering donating a retirement plan asset as a legacy gift in your estate? Jordan Waxman, BA’86, JD’91, BCL’92, may be able to help.
Waxman has over 20 years of experience in private wealth planning. Ranked as one of America’s Top Wealth Advisors by Forbes and Barron’s, he is co-founder and managing partner of Nucleus Advisors, as well as a member of McGill’s new Strategic Giving Council.
“The rules [around retirement plan assets] have changed over the years,” says Waxman. “I think compiling this information can be really helpful for people living in the U.S.”
For more on donating retirement plan assets – either during your lifetime or in your estate plans – Waxman shares his insights below.
Not offering any advice or opinion
Through this “Leaving a legacy: U.S. Bequests” article, McGill University, along with the presenter concerned, offer general information (the “Information”) only. The Information is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the Information presented here is believed to be factual and current, it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect those of the individual presenter concerned and are subject to change. Opinions expressed in this article are those of the interviewee and do not necessarily reflect those of McGill University or its members.
What are the benefits of donating U.S. retirement plan assets (IRA, 401K, Roth, 403B) as a charitable gift during your lifetime?
The benefits of donating retirement plan assets as a charitable gift (a qualified charitable distribution) only apply to the IRA (Individual Retirement Account). Substantial benefits don’t apply to a Roth because the money you take out of a Roth is tax-free. You’ve already paid the taxes on it, so it’s equivalent to withdrawing the asset into your personal account and then gifting it to charity; you simply get a charitable deduction for the grant.
If an individual has generous personal assets and they don’t necessarily need the income from their retirement plan, or they have more than enough in the form of distribution from that, Americans can direct up to $100,000 a year from a retirement plan directly to charities. This is referred to as an IRA charitable rollover, and it’s available to Americans aged 70.5 and older.
Typically, you’d take the money into your personal name, pay tax on it, donate it, and receive a charitable tax credit against your income. An alternative option is to take the money from your retirement plan and give it directly to charity so that it bypasses you. There’s no taxable benefit to the individual – you don’t get a tax credit – but you’re not subject to income tax, and the charity gets 100 per cent of your gift. In addition, it has the potential to lower the amount distributed in the future.
In New York and California, for example, the income tax on the highest income brackets is north of 50 per cent; diverting your assets can have an incredible impact on a charitable organization, and it means you can decide where it goes instead of the government.
What are the benefits of donating retirement assets to The Friends of McGill University, Inc. through your estate plans?
There are benefits to donating retirement assets to charity.
Making a charity the beneficiary of the asset means it is excluded from the estate and thus not subject to estate taxation. It’s certainly smart estate planning, and it’s beneficial to the charity as well: it can be a large sum of money for the university, and you can designate it to where you want it to fulfill your wishes.
Registered retirement assets (qualified charitable distributions) donated from the U.S. must go through The Friends of McGill University, Inc., a domestic charity.
Who is the ideal candidate for gifting retirement plan assets to charity through their estate?
The ideal candidates for gifting retirement plan assets are those who have substantial assets outside of the estate to give to their heirs, or have substantial assets that can be stepped up in basis.
A “step up in basis” means that if the price of an inherited asset is above its cost basis, at death the basis is increased to the value on that date. This minimizes capital gains taxes owed on an asset if it is then sold.
For example, if you have low-cost basis shares in your estate, your heirs will get a step-up in basis of the shares. It means your heirs won’t have a capital gain to pay once they receive them, but they can still be subject to the estate tax calculation.
If it’s a Roth retirement account, it can be subject to the estate tax calculation but it’s tax-free when it gets annuitized to the beneficiaries.
If the assets are IRAs or 401ks, they’re subject to income tax as well as estate tax; that’s two taxes. Thus, designating a charity as a beneficiary of retirement assets is efficient. It removes the asset from the estate tax calculation and the charity can withdraw the funds without incurring income tax.
How do you make The Friends of McGill University, Inc. the beneficiary of retirement plan assets?
You can designate “The Friends of McGill University, Inc.” as the beneficiary of your retirement plan on your plan’s beneficiary designation form.
If a charity is named as one of the beneficiaries of a retirement asset, is this revocable?
Beneficiaries of retirement accounts can be changed with written notice to the Custodian.
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