Current estimates tell us that qualified plans hold over $25 trillion – more than the national debt to put it in perspective. That number also represents the current gross amount, which is subject to income taxes – some of which will be susceptible to estate taxes as well.
As advisors, helping our clients mitigate or even eliminate the taxes on this tranche of their money is nothing short of beneficial.
In the world of charitable planning, there are numerous things that can be done if the qualified money will cause unneeded or unnecessary taxes.
First, we must determine whether our client is going to need his or her qualified money to live on. If the answer is yes, there are various non-charitable planning techniques that may apply. But, if they don’t need it, perhaps at all, there are several charitable strategies to be considered.
Naming a Charitable Beneficiary
First to consider within the charitable planning toolbox is to name a charity or charities as the beneficiary of the qualified plan assets. It does not have to be 100% of the assets and it doesn’t have to be until both spouses pass away, but it certainly is a potent way to eliminate the income tax due at the death of the account owner (known as income in respect of a decedent).
Since charities are tax exempt, they will owe no income tax on receipt of the funds and, with good planning, advisors can leave heirs other funds more tax efficiently through life insurance or other estate planning.
Testamentary Charitable Remainder Trust
A more advanced version of naming charity as an outright beneficiary is to set up a Testamentary Charitable Remainder Trust (TCRUT) and using it in a similar manner to a stretch IRA but preserving a charitable component.
Many current tax proposals would eliminate the stretch IRA for anyone but a spouse – making it a highly effective strategy to overcome that restriction.
Charitable IRA Rollover
For those that have large IRA plan balances and who are reaching the age of required minimum distributions (RMDs), the Charitable IRA rollover is a worthy option to consider. Up to 100k per year can be directed to a public charity, counting as part of the RMD, but not taxable to the account owner (not tax deductible either).
For those with large IRAs and a current charitable desire, this can be a powerful solution as it reduces the tax weight of the IRA and relieves the owner of a future tax time bomb. The rules are rather strict regarding this approach – it’s wise to familiarize yourself with them before you start giving out this advice.
Higher on the plane of compound strategies is the coupling of a Roth conversion with a charitable deduction to offset some or all of the taxes. One of the major oppositions to the Roth conversion is that the amount converted causes the account owner to be taxed.
By using other, non-qualified assets to contribute to a Grantor CLAT or a Pooled Income Fund, we can mitigate much or all the income tax on the conversion – making the Roth a much more compelling proposition.
We must consider the long-term estate impact of such a conversion – but a properly structured Roth conversion can be very effective.
Adding Charitable Planning to Your Business
Planning for the distribution and disposition of large qualified plans is one of the biggest challenges that clients and their advisors face. It’s one of the most frequently discussed and written about subjects in the planning community.
Integrating charitable planning adds a level of sophistication and a plethora of options that provide winning solutions for the client. Advisors who know these solutions can add more value for their clients and benefit society at the same time.