W hile you're alive and have philanthropic goals, give
appreciated assets held in a taxable account to charity. For
charitable bequests, designate your IRA or tax-deferred employer
Why? Suppose a hypothetical Al Cole wants to give $10,000 to
charity this year. Instead of cash, he donates $10,000 of ABC
Corp. stock that he bought for $2,000.
As long as Cole's holding period is more than one year, he'll
get a full $10,000 charitable tax deduction. Yet those shares
might be worth only $8,000 to Cole, after paying tax if he sold
them himself. The
and estate planning benefits are big.
Say Cole has $1 million of securities: $500,000 in a taxable
account and $500,000 in a traditional IRA.
Cole wants to leave $500,000 to charity and $500,000 to his
son Bob, who is in a high income tax bracket.
If Cole leaves the taxable account to charity, Bob will
inherit the IRA. Bob will have to take distributions, which will
be highly taxed on top of his other income.
Instead, Cole can leave his $500,000 IRA to charity. The
charity or charities can cash in the IRA bequest and owe no tax,
as they are tax-exempt.
Now Bob will inherit the $500,000 taxable account. He won't
owe any income tax on money he withdraws.
He also won't owe any capital gain if he happens to sell
securities in the account right away, before they gain more
value. That's because he gets a cost basis step-up to market
value on those assets.
This maneuver works especially well if the taxable account
The strategy applies whether you want to bequest all or just
part of your IRA.
It's better to use your IRA for donations in your estate plan.
But you must decide how to do it.
Say Ida Bass has a $500,000
. She wants to leave $50,000 to charity from her IRA. The rest of
her IRA would be split evenly between her two children.
Many IRA beneficiary forms require percentage allocations for
multiple beneficiaries. Bass might have to ask her IRA custodian
if it will accept an attachment to the form or a formula that
sends $50,000 to charity even if the account balance changes over
Or Bass might simply leave 10% of her IRA to charity. The IRA
form could say that each of her children will inherit 45% of the
amount in the account at her death.
That would leave the dollar size of her charitable bequest
indefinite. But Bass might not mind leaving more to charity if
the IRA grows, or leaving less if its value falls.
With either the fixed amount or the percentage approach,
problems can arise. The humans who will inherit the balance of
the IRA should make sure the charity is paid in full before Sept.
30 of the year after death.
If that's done, the humans can stretch out required
distributions of the IRA balance, extending tax deferral. But if
the Sept. 30 deadline is missed, taxable distributions will be
So individual beneficiaries should be informed about what to
do if a charity also is on the form.
Yet another solution is to split the IRA. Bass could transfer
$50,000 from her $500,000 IRA to a new one. Then her favorite
charity or charities would be the beneficiary of the new IRA.
And her two children won't have to worry about the charity if
they seek maximum tax deferral from the IRA they inherit.