The bailout law reinstates the special tax exemption for transferring funds directly from an IRA to a charity. But this tax break is available only to individuals in their 70s. What if you’re younger?
Strategy: Leave IRA accounts to a qualified charitable organization in your will. This effectively removes the accounts from your taxable estate. As a result, no estate or income tax will be due on the account balances.
You might set it up so the charity receives an amount above the federal exemption equivalent for the particular year. Under current law, the exemption equivalent is $3.5 million for 2009. It reverts to $1 million for 2011 after the scheduled repeal for 2010 (although these provisions may be changed by Congress).
Example: Your IRA is valued at $500,000, and the rest of your estate is worth $3.25 million (total of $3.75 million). Using this formula, the charity would receive $250,000 if you were to die in 2009. This would reduce your taxable estate to $3.5 million, so no federal estate tax would be due.
On the other hand, if you choose to donate IRA assets to charity during your lifetime, you must withdraw funds from the IRA first if you are under age 70½. This will trigger a tax on an IRA distribution. Then you’re entitled to a corresponding charitable deduction on your tax return.
Note that the recently revived tax break for donated IRA funds works differently for lifetime transfers.
A taxpayer who has reached age 70½ can transfer up to $100,000 of IRA funds directly to the charity. The transfer is tax-free, but the donor is not entitled to a charitable deduction.
3 helpful hints
If you decide to arrange a charitable bequest of IRA funds, follow these three suggestions:
1. Inform the IRA provider. The distribution of the IRA funds should be clearly stated in writing. Best approach: Name the charity as a beneficiary and specify the amount or percentage of funds to be donated to the charity.
2. Have your will and related documents—such as a letter of instructions—reflect the gift. Bring the executor into the loop. It’s also a good idea to notify other family members of your charitable intentions.
3. Make sure that the designated charity qualifies as a tax-exempt charitable organization.
Tip: This technique should be coordinated with other aspects of your estate plan.
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