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Sunday, May 5, 2024
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Case Studies |
The Philandering Philanthropist, Part 1 of 4 - IRA to Charity
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Case:
John Doe, 77, is a self-made man. Deserted by his parents at a young age, John grew up in a boys' home and on the streets. At the age of 17, he moved to Texas to chase oil and women. With his street smarts and gritty determination, John made millions in the oil business as an arrogant and risk-taking maverick. His fortune with women, however, was not nearly as successful. In fact, John was married - and divorced - four times. To this day, John still claims it was "all their fault" and remains bitter toward his ex-wives. Yet, he continues to date and currently has several "girlfriends." Also, John has six children, but unfortunately, does not have any ongoing relationship with them. He contends that his children are spoiled and ungrateful because he gave them too much while they were growing up. More likely, John's poor relationships stem from the lack of any family structure in his youth and the minimal amount of support given to him as a child.
John does have one love, though: his love for the boys' home that raised him. It is the one and only good memory from his childhood. It was his only family as a child. As a result, he has publicly supported the boys' home throughout his life and privately supported many of the people who touched his life while there.
Although his hours are nominal, John continues to draw a salary of $100,000+ as CEO and President of his company. John's estate of $10 million consists of a $5 million closely held "C" corporation, a $2.5 million ranch, a $2 million IRA and $500,000 in personal property (i.e., Cadillac, art collection, antique gun collection, jewelry, etc.). John intends to leave his entire estate to the boys' home at his death. However, he would also like to make a major contribution now, so he can see the effects of his gift durig his life.
Question:
John wants to know which assets he should give now and which assets he should give at death. John wants to know how to structure his gifts in order to make the best tax-wise decisions.
Solution:
Under current law, IRAs and other qualified plans are not assignable during life. Therefore, it is not possible during life to transfer IRAs or other qualified plans outright to charity or directly into a charitable remainder trust or gift annuity. Instead, a donor must take a withdrawal from the plan, which requires reporting the withdrawal amount as ordinary income and then making a transfer to charity. Fortunately, the transfer to charity will produce a charitable deduction, which may or may not offset the entire reported ordinary income amount.
John is not very thrilled with this option. However, Ted Swoon, John's financial advisor, reminded John that, since reaching age 70½, John has been taking required distributions from his IRA. This year, John is required to take a distribution of $99,502 from his IRA. Therefore, at minimum, John could contribute $99,502 to the boys' home this year and fully offset the ordinary income tax that would be due on the distribution. Because the contribution is a cash gift, it is subject to the 50% AGI limitation. Thus, John's total income for 2002 would be $199,502 (100,000 salary + 99,502 IRA distribution). Accordingly, his 50% AGI limitation would be $99,751. So, John could deduct his entire gift in the current year and owe no tax on his required IRA distribution. John loves the plan and decides to make the gift at the annual Christmas dinner.
As for the remaining IRA balance that will likely exist at his death, Ted suggested that John fill out a new beneficiary designation form listing the boys' home as the primary beneficiary. The form is very simple to complete and it - NOT a person's will - controls the final disposition of a person's IRA. The transfer of John's IRA to the boys' home at his death is great for charity and also great from a tax standpoint. If left to family, the IRA is subject to both estate and income tax, which could be as high as 80%! However, if left outright to charity, the IRA will not be subject to estate or income tax. Therefore, 100% of the IRA balance at John's death would be distributed to the charity with nothing going to the government. As a result, John completes a new beneficiary designation form naming the boys' home as the primary beneficiary and other charities as contingent beneficiaries in the event the boys' home does not continue to exist at his death. John feels a great sense of pride and comfort in knowing that his IRA will benefit the boys' home greatly for many years. From a tax standpoint, this plan is very effective since NO taxes should ever be paid on the IRA.
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