In my last article, I emphasized that a person generally cannot make any charitable gifts that take effect at death, unless he or she has used appropriate language in a valid Last Will and Testament.
There are exceptions to most every rule, though, aren’t there? In this case, the use of properly worded beneficiary designations on various types of assets can cause money to be paid directly to a charity at your death, outside of your Will. The major examples are life insurance policies, Individual Retirement Accounts, 401(k) accounts, and certain trusts. It is perfectly legal to name your favorite charity as the beneficiary of a policy of life insurance on your own life. The premiums you pay annually may not be deductible for income tax purposes; but at your death, the life insurance proceeds will go directly to the charity [e.g. AssumptionChurch] and will qualify as a deduction for estate tax purposes.
The same is true for IRA’s or 401(k) retirement savings accounts. In fact, there is a “double benefit” to using such assets to make a charitable gift at death. The fair market value of such assets is counted as part of your estate for estate tax purposes. But such assets also represent previously untaxed income! So, in addition to estate tax, as and when such accounts are collected by an individual beneficiary, he or she must also declare the proceeds as taxable income and pay tax on the funds received. Suppose, however, that Assumption Church is named as your beneficiary. In that case, the account’s fair market value is still an asset for estate tax purposes, but it also qualifies for deduction on your estate tax return because it passes to Assumption. And, when the account is actually collected by the Church, income tax is also avoided because Assumption is a tax-exempt organization. Next time, I’ll talk about trusts.
Questions? Call Dan Overbeck, Parishioner and retired Finance Council member, at 223-8963.