Gifts from Retirement Plans
Glossary
Definition
A deferred gift created through any of a number of government approved, or “qualified” plans that allow individuals to make pre-tax contributions that grow tax-free in the plan. Income is taxed when distributions begin, usually at age 70½.
Note: Recent federal legislation allowed individuals age 70½ and older to make outright gifts from certain IRAs directly to charity. This so-called "IRA Charitable Rollover" law expired December 31, 2007. While we hope the law may soon be extended and expanded, it is currently not possible to roll-over gifts from your IRA directly to charity without first taking a taxable withdrawal from your IRA.
Further Information
Retirement plans include assets held in Individual Retirement Accounts (IRAs) and assets held in accounts under 401(k) plans, profit-sharing plans, Keogh plans, and 403(b) plans. Contributions may be made to these plans with pre-tax income, and the plans grow tax-free. Income is taxed when distributions begin, usually at age 70½. There are penalties to avoid, such as taking distributions before age 59½, or not taking minimum distributions after age 70½, or retirement, whichever comes later.
Tax and Financial Implications
Retirement plans help conserve wealth for our later years. Unfortunately, many of us forget that these plans are also included in our estate. Because retirement plans are considered “IRD” assets (Income in Respect to a Decedent), heirs to these plans will pay income tax on the distributions just as you do now. If your estate is large enough, the plan may be reduced by estate tax as well. And finally, if the plan passes to a “skip generation” (e.g., grandparent to grandchild) it may also be subject to generation skipping transfer tax.
This single, double or even triple taxation makes retirement plans an attractive and tax-advantaged means to plan a gift to Clarkson. Since retirement plan assets that are gifted to Clarkson are not taxed, it is often suggested that other non-retirement, non-IRD assets are left to heirs and retirement plan assets are left to Clarkson, thus saving income and potentially estate and generation skipping taxes in both cases.
Since the rules and procedures vary from plan to plan, you should contact your plan administrator to determine the options to structure a gift to Clarkson. Your plan may allow Clarkson to be a sole, partial, percentage or contingent beneficiary. In some cases a sub-account is established within the plan to “hold” the eventual gift to Clarkson and avoid any unintended complications to other retirement plan heirs.
It may also be possible to plan a gift from your retirement account to fund a testamentary charitable remainder trust. In this way your heir(s) would receive income for life or a term of years before the remainder from the trust passes to Clarkson.
Another retirement planning option: Another option for retirement income in addition to traditional retirement plans is to create a “flip-CRUT” or a series of deferred gift annuities. You make annual gifts to the plan, generate an immediate income tax charitable deduction and allow the asset to grow tax-free (trust) or capture a higher payout rate each year (gift annuity). At some predetermined point in the future (like retirement) the plan begins making payments to you. This option is especially attractive if you have reached the limit on the amount you may contribute to a traditional retirement plan.
A gift planning strategy for plan owners who are “forced” to take annual distributions is to use the income to create charitable gift annuities or charitable remainder trusts, thus offsetting some of the income tax due on the distribution and generating income for future years.
A recent alternative for retirement planning is the “Roth” IRA. This option differs from traditional retirement plans in that contributions to the plan are made from after-tax dollars. Thus, the distributions you receive from the plan in future years are income tax free. Roth IRAs are generally not considered a tax-advantaged way to plan gifts to charity.
Process to Create
While every gift situation is unique, there are several steps that may be outlined to help clarify the process.
- You decide. Philanthropy is a lifelong process. At some point you may wish to express your thanks to Clarkson and help ensure a Clarkson education for future generations, and decide that a gift through your retirement plan is a place to begin.
- We talk. You may wish to speak with the gift planning office to make sure that your wishes can be accomplished at Clarkson, and to create the necessary documentation so that those who come after us can fulfill your intentions.
- You talk. You may meet with your plan administrator, and maybe your financial and legal advisers, to discuss your goals and craft your plan to include Clarkson.
- You sign. You make a final review and sign the appropriate legal documents with your advisor(s), creating or modifying your plan.
- You relax. You have just connected yourself with the past and the future as you continue the good work of those who came before you, and you prepare the way for those who will come after you. Enjoy the moment!
What to Expect After Your Plan is Created
The creation of your plan is the start of a new relationship with Clarkson:
- If you are a new member of the Annie Clarkson Society, you will receive letters of welcome.
- As an Annie Clarkson Society member, you will receive the Society newsletters and annual report each year.
This web page does not provide legal or financial advice, nor is it a comprehensive review of the topic. You should consult your legal and financial advisers and Clarkson University before making or planning your gift.