How Gifts To Charity Can Avoid
by Marc J. Lane

We've seen all kinds of publicity of late applauding the demise of the 15% excise tax on "excess" retirement plan distributions and "excess" accumulations held in a retirement plan at death. The tax was a "success tax" and good riddance to it. What isn't as well understood is that people who die owning retirement accounts and annuities will still have those assets taxed twice - once for federal estate (and sometimes state death) taxes that can claim up to 60% of their value, and again for "income in respect of a decedent" - or "IRD" - income tax in the hands of the recipient. IRD attacks nearly half the estates big enough to file estate tax returns.

Consider Happy Harry who dies with a $10 million estate, which includes a $1 million IRA rollover. If Harry named his son Kiddo as his sole heir and his IRA beneficiary, the IRA alone will trigger a federal estate tax of $550,000. But Kiddo won't net $450,000. Because of an onerous and quirky income tax calculation, he'll wind up with just $209,520!

But let's suppose Harry was a generous guy who really didn't mind leaving $1 million of his $10 million to his favorite charity. If Harry left stock or real estate to charity, Kiddo will benefit from a $1 million estate-tax charitable deduction reducing the taxable value of his father's estate, but he still must pay $550,000 in estate tax and $240,480 in income tax on the IRA.

If Harry was both generous and well advised, Kiddo can really make out. Had Harry left appreciated stock or real estate to Kiddo and the IRA to charity, look at the result. The estate gets the same $1 million estate-tax charitable write-off - but incurs no IRD on the IRA. After all, charities are tax-exempt. So, Kiddo saves $240,480 in income tax.

What's more, he'll never be taxed on the stock's or real estate's appreciation to the date of Harry's death. His basis gets "stepped up" - so, when he sells his inheritance, much of his capital gain will be income-tax free.

Charitable gifts of retirement assets and other IRD items often make good planning sense. But this area of the tax law is fraught with peril, and the careful coordination of one's estate and retirement planning is essential to insure the intended result.

Marc J. Lane may be contacted at http://www.marcjlane.com Marc Lane is a business and tax attorney, a Master Registered Financial Planner, a Registered Financial Consultant, and a Certified Investment Specialist. Marc is the author of 30 books on business organization, taxation, and personal finance. His newest book, "Advising Entrepreneurs: Dynamic Strategies for Financial Growth" draws from his experience working with those who have successfully built their businesses.

Marc is an Adjunct Professor of Law at Northwestern University and an Adjunct Professor of Business at the University of Illinois.

His practice areas include Individual Taxation, Corporate Tax Planning, Business Tax Planning, Estate Planning, Investments, Retirement Planning,Elder Law, International Trade, Business Law, and Wills, Trusts and Estates. Additional articles, case studies, and a free email newsletter are available at www.marcjlane.com.

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