On December 17, 2010, the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” was signed into law. The 2010 Tax Act raised to $5 million the exemption from the estate, gift and generation-skipping transfer tax.
In addition to raising the exemption to $5 million, the 2010 Tax Act extended through 2011 the provision in prior law that facilitated making charitable gifts directly from IRAs. Thus, an IRA distribution made before 2012 is excluded from gross income if the distribution is made from the IRA to a qualified public charity. There is a deduction limit of $100,000 per taxpayer.
This is an important provision in the law for someone whose IRA constitutes a significant portion of his or her estate and who wants to make lifetime charitable gifts to a charity.
IRAs are also an ideal vehicle to use to make gifts to charity at death. Because the assets in an IRA have not yet been subjected to income taxes, when the owner dies (or, if a spouse is the designated beneficiary, on the spouse’s later death) the IRA will be subject to a combined income and estate tax rate of about 50% before it passes to children (assuming the combined estates exceed $10 million).
One appealing way to completely avoid estate and income taxes on the IRA is to name a charity such as Rodef Sholom as beneficiary once the IRA owner and the spouse are gone. The effect of this is that the government contributes 50% of every dollar that passes to Rodef Sholom, and the husband and wife together contribute 5
Another effective IRA strategy is to convert the IRA to a Roth IRA. By doing so, one recognizes the deferred income in the year of conversion (or, if preferable, in the two years after conversion). But all income after the year of conversion accumulates tax-free. This is not for everyone. It typically makes more sense to make the conversion in a year of lower income or in a year when one has tax losses to offset the income resulting from the conversion. Also, a conversion makes more sense for people who have enough wealth to pay the income taxes from assets outside the IRA. This strategy also is more advantageous for people who don’t need the IRA money for retirement.
As with traditional IRAs, charities can benefit from a Roth IRA conversion. One strategy is to create a charitable lead trust where the charity receives the income from the trust and the donor receives a charitable contributions deduction to offset the income resulting from the Roth IRA conversion. After a period of time, the assets in the trust pass to family members.
One attractive feature of the Roth IRA conversion is that one can look back, and if the assets have gone down in value since the conversion, the conversion can be undone. The IRA owner has until October 15 of the year after the conversion to re-characterize the Roth IRA as a traditional IRA.
Finally, prior to 2010, one could not convert a traditional IRA to a Roth IRA if one had adjusted gross income of $100,000 or more. That income limitation has been lifted for conversions occurring after 2009 so that anyone, regardless of income, can convert a traditional IRA to a Roth IRA.
These are a couple of strategies involving IRAs that could benefit Rodef Sholom and give you significant tax savingThere are other strategies as well.
To learn more about planned giving, join us for the 2nd annual Estate and Legacy Planning event, Guidance for Giving: How Jewish Tradition Leads the Way, with a special presentation on Ethical Wills (Sacred Living, Sacred Dying) led by Rabbi Michael Lezak on Sunday, March 6, 9:30 am-11:15 am in the sanctuary. A light breakfast will be available in the social hall at 9:00 am. Please RSVP to Jane at firstname.lastname@example.org or 479.3441. Thank you.