Beneficiary Designations
Naming Luther Seminary as a beneficiary of a bank account, life
insurance contract, stock account, etc, are easy but effective ways
of making a deferred charitable gift. Since the donor normally
retains the right to remove the seminary as a beneficiary, no
current year charitable deduction is generated. Since beneficiary
designations are legally binding and will remove assets from
probate, donors should consult with the institution managing the
assets, as well as their personal advisors, to make sure that the
beneficiary form is properly executed and will be honored by the
managing institution.
Retirement Accounts
Retirement Accounts often make up a significant percentage of the estate
people leave behind. Many people overlook the possibility of naming Luther
Seminary as a beneficiary of retirement accounts, such as individual
retirement accounts (IRAs), 401(k) plans, 403(b) plans, profit-sharing KEOGH
plans, and simplified employee pension plans (SEPs).
One reason that retirement accounts are often overlooked as charitable gift
options is that they are often seen as quick and easy methods of
transferring wealth to their loved ones. However, from a tax perspective,
retirement account assets are often not the best assets to leave to your
family. If children or your estate are named as beneficiaries of retirement
plan assets, these assets will be subject to both income and estate taxes.
It is not uncommon for the combined income and estate tax burden to be 50%
or more, greatly reducing the value of the intended gift to loved ones. As
an alternative, retirement account assets transferred to Luther Seminary at
your death will not be subject to income tax or taxed in your estate –
thereby maximizing your stewardship.
Therefore, if you have incorporated gifts to family and charities in your
estate plans, you may wish to consider making your charitable gifts with
retirement account funds and giving appreciated stock, real estate, or other
assets to children.
The tax act of 2001 has made several changes in this area. As always, you
should consult your tax preparer and estate planning professional for the
most up-to-date information.
Example 1:
David recently passed away leaving an estate of $1 million. Under
his will, Luther Seminary is to receive $100,000. His wife, Mary, is
to receive the balance of his estate, including a $100,000 IRA
account. Since Mary is named as the beneficiary of the IRA, the
retirement account is not subject to the terms of the will, but is
includable for estate tax computation purposes. Mary is in the 31%
federal income tax bracket. |
Without Further Planning:
Because Mary is a surviving spouse and the seminary is a qualified charity,
David’s estate is not subject to estate tax. However, Mary must claim the
$100,000 retirement account as income as she receives it. Consequently,
$31,000 of the fund will be lost to federal income tax as Mary receives the
proceeds. Thus, only $69,000 (after-tax) is available to Mary from the IRA.
(Even less is available to Mary after state income taxes are factored in.)
With Further Planning:
Before his death, David named Luther Seminary as the beneficiary of the
$100,000 retirement account, and Mary as sole heir under his estate. Now,
none of the IRA is subject to income taxes.
Example 2:
Sally recently passed away leaving an estate of $5 million. Under
her will, Luther Seminary is to receive $1 million. Her daughter,
Sarah, is to receive the balance of her estate, including a $1
million IRA retirement account. Since Sarah is named as the
beneficiary, the retirement account is not subject to the terms of
the will. |
Without Further Planning:
The $1 million gift to the seminary reduces the taxable estate to $4
million. The estate tax on this amount is $1,840,800. Sarah receives
$2,159,200 ($4,000,000 - $1,840,800). Since this amount includes the $1
million IRA, Sarah must pay income tax on this amount as well. This reduces
Sarah’s inheritance even more. After estate and income taxes, more than 53%
of her inheritance has been lost to taxes.
With Further Planning:
By making Luther Seminary the beneficiary of the $1 million IRA account and
taking the seminary out of the will, there would be no reduction due to
income taxes. With proper additional planning, the estate tax could have
been significantly reduced as well.
Bank and Stock Accounts
Bank and Stock Accounts may name Luther Seminary as beneficiary. Since
the donor retains ultimate control, no current year income tax deduction is
generated. However, upon the donor’s death, the bank or brokerage firm will
transfer the account into the seminary’s name or, upon request, close the
account and issue a check to the seminary. If the donor wishes to designate
how the future gift will be used, he or she should contact the seminary in
advance.
Example:
Harlan, age 90, would like to include the seminary in his estate
plans, but he doesn’t have a will and really doesn’t need one. Could
he gift a bank account? |
Solution:
Harlan asks his bank to add Luther Seminary to one of his bank certificates
of deposit. Each time the certificate comes due, he adds the seminary’s name
to the new certificate. Harlan contacted the seminary and entered into an
agreement assuring that the funds would be used for current year
scholarships upon receipt. Upon his death, the bank issues a check to the
seminary for the certificate’s accrued value.
Life Insurance
Life Insurance offers most people access to an instant estate. With
proper planning, life insurance may be used to leverage smaller current
gifts into a larger gift at death. Life insurance may be used in several
ways to make a significant charitable gift.
New Policies
New Policies may be purchased naming the seminary as owner,
beneficiary, or owner and beneficiary. If the seminary is named as the
owner and beneficiary, policy premium payments may be deductible as
charitable contributions for income tax purposes. Upon the donor’s
death, the seminary receives the death benefit. For couples with an
uninsurable spouse, a survivor policy may be a good option to consider.
This type of policy pays only upon the second death; as a result,
premium charges are usually somewhat less.
Paid-Up Policies
Paid-Up Policies may be contributed to the seminary. This frequently
occurs when the donor’s children are grown and the donor has other
assets to provide for future needs. Once the seminary is named as owner
and beneficiary, the donor receives a charitable contribution which
roughly approximates the policy’s cash value. Upon transfer, the
seminary may surrender the policy or hold the policy until the donor’s
death.
Example:
John, age 45, contributes $1,000 annually to Luther Seminary but
would like to leverage his gift to make a larger, more significant
contribution to the seminary in the future. |
Solution:
John purchases a policy having a death benefit and annual premium that fits
his charitable objectives and financial circumstances. John makes an annual,
unrestricted gift to the seminary in an amount at least equal to the premium
amount. The seminary pays the premium directly to the insurance company and
sends a gift acknowledgement to John for his gift. Because John itemizes his
deductions for income tax purposes, the charitable contribution saves him
tax dollars annually. Since the insurance policy is not a term policy, John
qualifies for membership in Luther Seminary’s Heritage Society.
Wealth Replacement Life Insurance
Wealth Replacement Life Insurance is used to replace the value of assets
given to a charity such as Luther Seminary. By purchasing a life insurance
policy and naming family members or other loved ones as beneficiaries,
donors are able to “replace” the value of assets given as charitable gifts.
Donors typically use the income tax savings generated by the gift (and
sometimes the income from an income-returning gift) to purchase the life
insurance policy. The new policy makes the donor’s heirs and loved ones
whole again. Typically, the new policy (often a survivor or second-to-die
policy) is purchased by and placed in an irrevocable life insurance trust (ILIT).
If annual premiums are due, funds are transferred to the trust and the trust
makes the premium payments. If the donor prefers, a policy may be purchased
with a single premium payment
|
Example:
Bill and Mary, ages 67 and 65, are recently retired and would like
to make an income-returning gift to Luther Seminary. However, they
feel that their children should receive the assets they would use to
make the gift. |
Solution:
Bill and Mary contribute property to Luther Seminary through a charitable
remainder trust and receive an income stream for their lives at an agreed
upon percentage. They receive a current year charitable contribution for the
present value of the reminder interest given to the seminary. Using the tax
savings resulting from the gift and some of the income from the trust, they
contribute dollars to an irrevocable wealth replacement life insurance
trust. The trust purchases a single premium survivor life insurance policy
equal in value to the assets used to fund the charitable trust. Following
the second death, the insurance proceeds pass estate tax free to their
children, and the seminary receives the principal remaining in the
charitable trust.
Caution: U.S. Savings Bonds
U.S. Savings Bonds may not be contributed to a charity during a
person’s lifetime. The only way to use the bonds to make a charitable
gift during lifetime is to cash them in and contribute the proceeds. With
proper planning, they may be bequeathed to charity.
For assistance and additional information on any of the gift options
outlined above, please contact:
Bradley O. Reiners, JD, CFRE.
Associate Vice President for Planned Giving
Luther Seminary
2481 Como Avenue
St. Paul, MN 55108
651-641-3450 (direct)
888-358-8437 (toll-free)
651-641-3531 (fax)
www.luthersem.edu/gifts/plannedgiving
Information and examples contained herein are not intended as
financial, legal or tax advice and should not be relied upon as such. You
are urged to consult with your tax preparer, attorney and other planning
professionals about your specific case.
|
