The Private Foundation And Your Retirement Plan: A Way aTo Preserve Value And Minimize Estate Tax


If you have a taxable estate, one of your estate planning goals is or will be to minimize estate tax (and consequently, to maximize estate value). Creating a private foundation is one way to accomplish this goal. One way to fund a private foundation for this purpose is to use your retirement accounts. If you weren't already enjoying your Monday, sit back and get ready...

When calculating a decedent’s gross estate the entire value of all retirement accounts owned by the decedent at the time of death is included in the calculation. For example, if the decedent had real property and investment accounts with a value of $11 million dollars, and an IRA with a value of $3 million dollars at the time of his death, his gross estate would be valued at 14 million.

The current unified estate and gift tax exemption amount is $5.43 million dollars per spouse (10.86 million per married couple). This amount is tied to inflation and will likely soon rise to $11 million per couple. While the federal estate tax will currently affect under 1% of the American population, there is still a substantial number of Bay Area families who will need estate tax planning to help minimize their exposure to the 40% federal estate tax.

In certain circumstances, the creation of a private foundation can be a useful tool to shield assets from estate tax and put them to work toward different philanthropic groups of your choice. A private foundation is a nonprofit organization which is usually created by a single primary donation from an individual or a business, and whose funds and programs are managed by its own trustees or directors. Many donors will place family members on the board of directors or as trustees in order to allow them to continue to receive a reasonable salary for their work, as well as to assure that the donor’s intended charitable legacy continues (a more detailed look at private foundation formation to come).

A great way to fund a Private Foundation is to bequeath all qualified retirement accounts to the foundation. Qualified retirement plans and individual retirement accounts are custodial accounts that hold a person's tax deferred retirement assets. Their principal tax advantage is income tax deferral during the life of the contributor. They include profit sharing plans, ESOPs, 401(K), "Keogh" plans, IRAs, SEPs and SIMPLE Plans.

Generally speaking, a distribution from a retirement, IRA, or 403(b) plan to a plan participant is a taxable event. This means that if you choose to withdraw money from one of these types of funds, it will be taxed as ordinary income. Furthermore, distributions from one of these plans received by a plan participant before age 59 ½ are subject to an additional 10% penalty (with some exceptions). See, IRC §402(a), §72(a), and §72(t).

Creating a private foundation and naming the foundation as the beneficiary on the retirement accounts can eliminate both the tax on the distribution, and potential estate tax consequences at death. While the law does not currently allow tax-free transfers from a retirement plan to a private foundation or charity during life, a plan that directs its proceeds to charitable organization at death (i.e. a testamentary charitable transfer of retirement plan assets) will avoid tax on Income in Respect of a Decedent (“IRD”).

To further explain, IRD is money that was due to a decedent at the time they died. This money will pass through to the recipient or estate as income during that tax year. The recipient (beneficiary) must declare the money as income in respect of a decedent (IRD) for any year in which income is received. The estate must also claim the income, but may claim a deduction in the amount of income tax due on the IRD. IRD isn’t taxable to charities. This means that outright bequests of IRAs to charity avoids tax on the IRD.

One approach may be to give appreciated stock outright to family members who will get a stepped-up basis, and give the IRA and other IRD “items” to your very own private foundation. The private foundation, being tax exempt, doesn’t pay tax on the IRD. And of course, you are limiting tax on the decedent’s estate (separate from income tax) at the same time!

For death-time transfers from IRAs, there isn’t a ceiling or limitation on the types of charitable donees. Thus, distributions to all private foundations and public charities (including supporting organizations and donor advised funds) qualify.

That all makes perfect sense, right? 🙂 Check back for more information on foundation formation! Happy Monday!


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