First of all, the client achieved tax benefits over time as the client contributed money to a traditional IRA (or to an employer-sponsored plan). That’s because contributions to certain retirement plans are what the IRS considers “pre-tax”; your client does not pay income tax on the money used to make those contributions (subject to annual limits).
Second, assets in IRAs and qualified retirement plans grow tax free inside the plan. In other words, the client is not paying taxes on the income generated by those assets before distributions start in retirement years. This allows these accounts to grow rapidly.
Third, when a client leaves a traditional IRA or qualified plan to a fund at the community foundation or another charity upon death, the charity does not pay income taxes (or estate taxes) on those assets. By contrast, if the client were to name children as beneficiaries of an IRA, for example, those IRA distributions to the children are subject to income tax, and that tax can be hefty given the tax treatment of inherited IRAs.
So, if your client is deciding how to dispose of stock and an IRA in the client’s estate plan, intending to leave one to children and the other to charity, leaving the IRA to charity and the stock to children is a no-brainer. Remember, the client’s stock owned outside of an IRA gets the “step-up in basis” when the client dies, which means that the children won’t pay capital gains taxes on the pre-death appreciation of that asset when they sell it.
Here’s the net-net:
Traditional IRAs are often poor vehicles for your clients to use to leave a family legacy. Instead, if a client is charitably inclined, traditional IRAs are likely better deployed to posthumous philanthropy if other assets, such as appreciated stock, are available to leave to children and other heirs.
The Community Foundation is always happy to work with you to ensure that your clients are maximizing their assets to fulfill their charitable giving goals.