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Retirement Assets

Many donors and friends are surprised to learn their heirs will receive relatively little of the balance of IRAs, 401(k) plans, and others after estate, income, and other taxes are deducted. Since retirement plans typically accumulate tax-free earnings, the balance of your retirement account is most likely subject to double taxation - income tax and estate tax. Careful planning may minimize these taxes.

IRA Rollover Provision – Established in 2006 and considered for extension annually

Recent legislation extends the opportunity to those who:

  • Are age 70 1/2 or older; and
  • Own an IRA

The law, originally titled Pension Protection Act of 2006, allows IRA owners to make distributions directly from their IRA to one or more charities without the distributions being included in taxable income and subject to withholding. Previously, if you wanted to use IRA funds for a charitable contribution, you had to withdraw money from your IRA and then contribute it. The amount you withdrew was taxable, and the deduction for the contribution may or may not have offset the tax. Another benefit of this legislation is that the funds transferred from your IRA to a charity count towards your mandatory withdrawal.

Example: Suppose Nancy has $700,000 in an IRA and will be required to withdraw approximately $35,000 this year, and suppose further that Nancy wants to contribute $10,000 to the Santa BarbaraBotanic Garden. She can authorize the company investing her IRA to transfer $10,000 to the Garden and $25,000 to herself. The $10,000 distributed to the Santa BarbaraBotanic Garden will not be subject to tax, but does count towards her required withdrawal.

Making charitable contributions from an IRA rather than other assets is appropriate for those who:

  • Are already giving at their 50% deduction limit;
  • Do not itemize deductions;
  • Would not be able to deduct all of their charitable contributions because of deduction limitations;
  • May lose some of their itemized deductions because of their income level; or
  • Are required to take distributions but do not need them for living expenses.

This law allows distributions to be either undesignated or directed to a specific purpose of the Garden’s General Endowment.Certain limitations apply to these non-taxable charitable distributions from an IRA:

  • They cannot exceed $100,000 per year per spouse;
  • They must be made to a public charity; Gifts to the Santa BarbaraBotanic Garden qualify!
  • The gifts must be outright (i.e., they cannot establish a gift annuity or fund a charitable remainder trust); and
  • These tax-free distributions can only be made through December 31 (in years when Congress has extended this provision).

The legislation offers a welcome incentive to donors who want to use the money in their IRAs to make charitable gifts. The legislation makes the process simple and assures these donors their gifts will not increase their taxes. To qualify for IRA rollover treatment, the donor must direct the IRA manager to transfer funds directly to charity. A withdrawal followed by a contribution will still have to be reported as income. Donor advised funds and supporting organizations are not eligible. Neither do outright distributions to charity from employer-sponsored retirement plans, such as Simple IRAs, 401(k)s, and 403(b)s. Note that Roth IRA distributions ordinarily are not taxable, so the tax benefits of the new IRA rollover don’t apply to Roth IRAs.

Gifts through retirement plans can generate tax benefits that allow you to fulfill charitable goals and to plan for a secure retirement. This way can be especially beneficial if you have accumulated substantial retirement assets and wish to reduce income and estate taxes.

Naming the Garden as a beneficiary of all or part of your IRA or retirement plan can achieve both estate tax and income tax savings, leaving your family and loved ones assets not subject to additional income taxes. Simply use your plan's beneficiary form so the Garden can receive an outright distribution from your IRA or retirement following your death. Be sure to let your plan administrator know the Garden is a charitable organization (tax identification number 95-1644628). Do not use retirement assets to satisfy a bequest in your will, or the estate may end up paying more taxes - use your plan's beneficiary designation form.

Life Income Gifts: If you have adequate income from sources other than qualified retirement or excess income assets, your retirement assets can be used to make a lifetime charitable gift.

Once you reach age 70 1/2, you must begin taking minimum distributions out of your IRA or retirement plan. Income tax on minimum distributions can be offset by a charitable deduction to the Garden. Generally, funds in qualified retirement plans grow tax-free over time, and income tax is assessed only when you withdraw from the plan. If you would like an income tax deduction, offsetting some, if not all, of the income tax due, you may want to make an outright gift to the Garden after withdrawing money from your retirement plan and pay the income tax on the amount withdrawn. By giving a gift in this manner you will receive an income tax break while removing a portion from your estate, thereby avoiding estate taxes.

Gifts Effective at Death: Retirement assets may be subject to income taxes in your estate. To avoid this tax you can include a statement in your will or trust to direct the "income in respect of decedent" (tax due on the income earned in your retirement plan) to the Garden. Since the Garden is tax-exempt, you avoid both income tax and estate tax and can then leave your heirs estate gifts not subject to double taxation.

You may want to transfer the balance of your IRA or retirement plan at your death to a charitable remainder trust with your spouse or other heirs receiving an income for their lifetimes or for a period of years. Your spouse will avoid estate tax, and other beneficiaries will have a reduction in the estate tax. In both cases, the transfer of assets would not trigger income tax upon death, and your heirs could receive more than if they had received the retirement assets outright.

 

The Santa Barbara Botanic Garden
Tax identification number 95-1644628
1212 Mission Canyon Road
Santa Barbara, CA 93105

The Santa Barbara Botanic Garden fosters the conservation of California's native plants through
our gardens, research and education, and serves as a role model of sustainable practices