Focus on planned giving and retirement accounts

Helping your clients with charitable giving

Note: This is the sixth in a six-part series of articles contributed by the Maryland Community Foundation Initiative to help advisors work with their clients on charitable giving.

Often, one of your greatest opportunities to assist your clients in maximizing the personal benefits of giving occurs when they are making other major business, personal and financial decisions, such as:

estate planning;
writing or revising a will;
the sale of a business or other major asset;
retirement planning; or
at times of a financial windfall, such as a merger or acquisition.

In many of these situations, an opportunity exists to help your clients through planned giving.

Planned Giving 101

Planned giving refers to several gift techniques that typically involve your client retaining a portion of, or an interest in, the asset the client is giving to charity. Some people consider charitable distributions under a will or trust, life insurance and retirement plan to be beneficiary designations, and other direct – but deferred – gift arrangements as also being planned gifts.

One of the simplest and most important things you can do to help your clients enjoy the benefits of planned giving is to ask them the giving question: “Are there charitable or community needs you would like to support?" Helping your client make planned gifts is a way to ensure that his or her charitable intentions are carried out and will outlive him or her. You need not be an expert to make these opportunities available. Your local community foundation can help you sort through the numerous options available to your clients.

Planned gifts can provide your clients with many benefits. These benefits can include an immediate charitable income tax deduction (even though the charity may not receive any property until some future date), avoidance or deferral of capital gains taxes on appreciated property used to fund the gift, retained and possibly increased income to your client or others he or she cares about, possible assistance in asset diversification and, last but not least, support for charitable causes.

Planned giving through retirement plans

Attracted to the tax-deductible contributions, many individuals have amassed significant wealth in their pension plans and individual retirement accounts. Income tax-deferred retirement accounts allow assets to grow on a tax-deferred basis. However, the owner is taxed on the withdrawals at his or her income tax bracket at the time when withdrawals begin.

If, after death, the retirement account benefits are paid to anyone but the account owner's spouse, those benefits may be subject to estate taxation as well (if the owner's estate is above a certain value). This combined income tax and estate tax may be as high as 75 percent. If, however, your client leaves tax-deferred retirement accounts to a charitable organization at death, he or she can transfer these assets without incurring any taxation.

One simple way to implement your client’s philanthropic wishes is for your client to name the local community foundation as a beneficiary of his or her retirement plan. Retirement assets can be gifted easily to a community foundation at death. This can be done by designating the community foundation as the beneficiary for the retirement asset. Tax savings can be significant.

For example, if your client were to give a $100,000 IRA to his or her children at death and another $100,000 of assets to the community foundation, the children would have to pay income taxes on the IRA (in addition to any estate taxes that might be owed). By giving the IRA to the community foundation and the other assets to the children, all of the income taxes are avoided on the IRA. This income tax benefit can be important when planning the distribution of your clients’ pension, profit sharing, Section 401(k) and Section 403(b) plans and IRAs.

Clients can use assets held in an individual retirement account, 401(k), 403(b) or similar account to start a fund at the community foundation at the time of their death. Many donors choose to donate all or part of their retirement plan to the community foundation to set up a donor advised fund, naming their children as the advisors. This arrangement allows children to participate in distributing a larger pool of charitable funds than would have been available if the money had been left to them outright.

Important details about giving through retirement plans

Changing the beneficiary of a retirement fund can be as easy as filling out a form – especially for IRAs. Your client will not have to rewrite his or her will or add a codicil to exercise this option.
If an account owner wishes to pass the account on without having it be taxed at all, he or she may designate the community foundation as the primary beneficiary. This means the account will pass directly to the community foundation at the owner's death, not to a spouse or child.
If both spouses wish to use their retirement accounts to benefit the community foundation after both spouses die, they can both name the community foundation as the contingent beneficiary of their retirement accounts. This means that when the first spouse dies, that spouse's retirement account will pass to the living spouse. The living spouse will incur income tax but not estate tax. When the second spouse dies, the accounts will pass to the community foundation without any taxation.
Alternatively, your client may also designate the community foundation for a percentage of the assets that remain in the plan at his or her death.

Getting help with planned giving

There are a number of different planned gift options, each of which is useful in certain circumstances. The goal is to find the planned gift that is most advantageous to your clients, to their families, and to the causes they support. The staff of community foundations -- with years of legal and financial planning experience -- can provide assistance to help you create planned gifts that are right for your clients.

For more information

Log onto http://www.mdcommunityfoundation.org/ for more information or to connect to a community foundation near you.

Baltimore Community Foundation
The Community Foundation of Carroll County
Community Foundation of the Chesapeake
The Columbia Foundation
Community Foundation of the Eastern Shore
The Community Foundation of Frederick County, MD
The Mid-Shore Community Foundation
The Montgomery County Community Foundation
The Prince George’s Community Foundation
Community Foundation of Washington County, MD

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