Kevin ’67 and Connie Hackett

DSC_0089When Kevin ’67 and Colleen Hackett sat down with their lawyer to discuss estate-planning matters with regards to their IRA account, their main goal was to figure out what would be the most tax-efficient way to benefit their heirs, while at the same time benefitting the charitable causes the they support.

“My lawyer said I should consider naming a non-profit as one of mine and Colleen’s IRA beneficiaries,” said Hackett. The answer surprised the Hacketts. “When I asked why, my lawyer told me that when you name a non-profit as an IRA beneficiary, the money comes right off the top, lowering the tax burden on our other beneficiaries. I was totally unaware this was possible, but the fact that Connie and I can support Fordham Prep and still benefit our family is a win-win scenario.”

Hackett, who was a long-time member the Fordham Prep Board of Trustees and recently inducted into the Fordham Prep Hall of Honor, now wants his fellow Rams to take advantage of the tax break and support Fordham Prep.  “The tax rate for IRA beneficiaries is fairly substantial and would place an unfair burden on them. Naming a non-profit as a beneficiary is not a difficult thing to do and my hope is that people realize that they can make a difference through a simple action,” says Hackett.

“Doing something like this has been on my mind for a while, as I recently realized I am not immortal. In my experience, the wise thing to do is to talk to your advisors or lawyer to figure out a way to provide for the Prep.”

Traditional IRA accounts are taxed three times when a person passes away.

  • They are included in your estate for federal estate tax purposes when you die.
  • The taxable portion of the IRA balance (which is often the entire amount) is counted again as “income in respect of a decedent” (IRD) for federal income tax purposes. That means federal income tax will be owed when your estate or your heirs take IRA withdrawals.
  • State income tax may be due as well.

After all these taxes have been paid, your heirs may receive only a very small fraction of your IRA money while tax collectors get the lion’s share.

A tax-smart solution is to leave some or all of your IRA money to charitable beneficiaries while leaving everything else to your heirs. The net result will be more after-tax cash for them.

By naming one or more tax-exempt charitable organizations as beneficiaries of your IRA, you leave that money to the charities after your death. Under our current federal tax system, that is the only way to leave IRA balances directly to charity. On the other hand, leaving IRA money directly to charities upon your death by designating them as account beneficiaries is tax-efficient. First, an IRA balance left to charity avoids the federal estate tax, since it is removed from your estate for federal estate tax purposes. Second, there’s no federal income tax due on the IRA money (the IRD rules do not apply). There is no state income tax either. Finally, no income taxes are due when your favorite tax-exempt charities take their withdrawals from the IRAs. So you avoid double or triple taxation in a simple way.

When all is said and done, this strategy allows you to leave more to your favorite charities, more to your loved ones and less to the tax collector. Designating your favorite charity as a beneficiary of your traditional IRA (and other tax-deferred retirement accounts) can be a tax-smart maneuver. With advance planning and the federal estate tax exemption, you have more opportunity to minimize both federal and applicable state income and estate taxes.

Note: Neither Fordham Prep nor its employees and related parties provide tax or legal advice. You should consult with your legal counsel and/or your accountant or tax professional regarding the legal or tax implications of a particular suggestion or strategy including any estate planning strategies before you implement. In addition, the information is current as of the date of this publication and is subject to change without notice.

Source for parts of this article came from the CPA firm WSRP based in Salt Lake City, Utah.