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 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.
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.
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.
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?
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 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 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 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.
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.
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
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.
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:
Director of GIft Planning
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.