A majority of high net worth households—up to 91 percent—donate to charity. That’s compared to just 59 percent of the total population, according to research from the Indiana University Lilly Family School of Philanthropy. As an expert in wealth maximization and estate planning, I know from experience that philanthropy is high on the list of priorities for my clients. Together, we often strategize so they can maximize their ability to share their wealth with favored charities for years—or even decades—to come.
The Indiana University study suggests that affluent individuals and families more often than not share their wealth with both local and national charities and organizations. In fact, Giving USA noted that charitable gifts given by individuals accounted for almost three-quarters of the $390 billion donated to nonprofits last year. While charities benefit from this generosity, there are also tax benefits that you, as the donor, can take advantage of—a key aspect of estate planning. And new rules enacted by Congress have made it easier to make a sizable donation to charities without counting the money gifted as taxable income.
Federal law now allows a Qualified Charitable Distribution (QCD) of up to $100,000 to be made directly from an IRA. Unfortunately, most donors are not aware of this rule; the Indiana University study found that just 4.1 percent of donors are gifting from their IRA or retirement fund assets, suggesting a massive gap in awareness—and a need for expert financial advice.
Individuals donors simply cannot keep up with the ever-evolving tax laws. For this reason, it is crucial to have a trusted professional by your side that can advise you on how to give the most to charities while lowering your overall estate value and, ultimately, maximizing your ability to plan for your estate.
Important Details on the Qualified Charitable Distribution Rule
Regulations allowing IRA Qualified Charitable Distributions have been on and off the books since 2006, making it difficult to know when, and how much, can be gifted from your IRA. Fortunately, legislation passed in 2015 made the rule permanent, allowing for tax-free charitable distributions of up to $100,000 per year per taxpayer.
There are, however, some important restrictions on IRA QCDs that investors must know:
- The IRA owner must be 70 ½ years old. On the date of the distribution, the owner of the IRA must be at least 70 ½. This is an important distinction as some distribution rules are calendar year, as opposed to age, restricted.
- Distributions must be made payable directly to the charity. The IRA owner cannot receive the funds; instead, they must go directly to the desired charity organization. This is to ensure that the nonprofit is the ultimate recipient of the funds.
- Married couples can each donate $100,000. Using this rule, married couples can each individually donate up to $100,000 per year; however, distributions must come from their own separate IRAs.
The most important aspect of the rule on IRA Qualified Charitable Distributions is that the distributions can be used to satisfy required minimum distributions (RMD) so that IRA investors are able to make a significant tax-free distribution. This is attractive to individuals that have well-funded IRAs and don’t need to rely on their required distributions to maintain their lifestyle during retirement. Individuals with sufficient wealth or retirement income from other sources are able to take full advantage of this tax-free distribution.
Using an IRA Qualified Charitable Distribution to Reduce Your Estate Taxes
As a wealthy individual, you may want to consider how to reduce the amount of your estate subject to taxation with the help of a trusted financial advisor. Maximizing annual QCDs provides your preferred charities with ongoing financial support while offering you as an investor the additional benefit of reducing the value of an IRA that would otherwise be taxable.
Over a 10-year period, a married couple can distribute $2 million in tax-free funds to charities, concurrently lowering the tax bill on their estate. Most importantly, your favorite charitable organizations can receive the benefit of your generosity during your lifetime.
Purchasing Life Insurance with IRA Distributions
Leveraging the IRA QCD rule is one way to make substantial charitable donations while you’re alive, but another important element to estate planning is ensuring that these charities can continue to benefit from your estate after you’ve passed. One path to building up a large charitable gift is to make a QCD to your preferred charity which can purchase a properly structured life insurance policy and name itself as beneficiary. Even late in life, you can purchase life insurance that will provide a greater philanthropic benefit than simply passing on the value of your IRA.
The good news is that depending on what you want to accomplish, you can take advantage of IRA Qualified Charitable Distributions for annual donations as well as fund a life insurance policy using separate distributions from your IRA.
The good news is that depending on what you want to accomplish, you can take advantage of IRA Qualified Charitable Distributions for annual donations as well as fund a life insurance policy using separate distributions from your IRA. This might be the case if you wanted an irrevocable trust to be the owner of the life insurance and planned on the policy benefiting both family and charity. Depending on age and health, an $80,000 annual IRA distribution can fund a life insurance policy with a guaranteed payout of $5 million. If your IRA has a value of $2 million, you can use annual distributions to cover premiums on a life insurance policy with a far greater value to your beneficiaries. Purchasing that life insurance policy inside of a life insurance trust makes the full value of the death benefit tax-free. If your goal is more singular, and you simply want to donate money tax efficiently to charity, a single QCD will suffice.
With these approaches, the remaining balance in your IRA remains intact and continues to grow. In addition, upon your death, your charity and family beneficiaries will not only receive the life insurance benefit but the remaining value of your IRA as well. This is a win-win financial tactic for estate planning. An IRA strategy that enables you to take advantage of tax benefits while maximizing your estate, the QCD rule is an excellent means to share your wealth with charities while also protecting your and your loved ones’ financial futures.
The experts at Howard Kaye Insurance will work with you to ensure that you are strategically taking full advantage of all current IRA tax benefits. We can also advise you in how to purchase a life insurance policy using IRA distributions in order to increase the value of your estate. Call us at 800-DIE-RICH to speak with one of our experts or contact us online.
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