At a glance
• Leverage your IRA
• Learn the strengths behind Charitable Gift Annuities
• Avoid Capital Gains by establishing a Unitrust
SPRING 2025
Retirement is an opportunity, a new phase, a time to do those things you’ve always wanted to do, and a period to redefine and refine your priorities. Consider that a retirement that begins at age 65 can easily be fifteen to twenty-plus years in length. That means we need to rethink how we save and how we convert those savings into income-producing assets.
Most people contemplating retirement understand that Social Security benefits may not be a reliable source of income. Therefore, it is important to heed the advice of investment experts to save a percentage of earnings and take full advantage of tax-deferred retirement opportunities.
Tax-Savvy Charitable Planning Options
Four ideas that combine retirement funding with charitable giving are:
1) donations through IRA contributions
2) the bequest of all or part of your retirement plan to a nonprofit organization
3) charitable gift annuity
4) charitable remainder unitrust
The Individual Retirement Account (IRA) has become a hot topic in recent years as many account holders are now making plans to pass on these assets to beneficiaries. In addition to versatile benefits, like retirement income, IRAs can be leveraged to give you longer-term tax benefits and provide charitable support to Christian Appalachian Project (CAP).
The IRA is a great tool for growing and retaining your assets because the income from the account’s earnings can grow each year without being taxed. Consider the IRA as a versatile container that holds stocks, bonds, mutual funds, and other assets and works as a savings account that can provide significant tax breaks. Due to recent rule changes, they have also increased significant burden on individual beneficiaries when IRAs are used to pass on inheritance to loved ones. It is important to understand the most strategic way to use your IRA savings for maximized benefit to you, your loved ones, and to your favorite causes.
Individual Retirement Account
Maximize Your Qualified Charitable Distribution
There are parameters and penalties around withdrawing funds from your IRA prior to turning 59 ½ years old. Traditional IRAs require you to take an annual Required Minimum Distribution (RMD), as determined by the account balance and your life expectancy. This traditionally starts at age 73, the age will be raised to 75 beginning in 2033. Normally, these distributions to you would be subject to income taxes, which may impact your income bracket for that year.
However, for persons aged 70 ½ and older, there is a tax-smart option available. You are now eligible to make an annual Qualified Charitable Distribution (QCD), otherwise known as an IRA Charitable Rollover, which allows you to direct the transfer of up to $108,000 to public charitable organizations without treating the distribution as taxable income. (For married couples, each spouse can make a QCD of up to $108,000.) The distribution must go directly from the IRA to the charity. Donors may receive no goods or services in return for these contributions and must obtain written documentation of the contribution from each recipient public charity.
Beneficiary Designation
Name a Public Charity as Beneficiary of your Retirement Plan. For retired persons with the bulk of their assets in IRAs, corporate or partnership pension plans, or profit-sharing plan accounts, there is another option. Significant advantages exist in listing charitable institutions, such as Christian Appalachian Project (CAP), as a beneficiary of one or more of these retirement plans. Charitable bequests can be funded with retirement funds by naming CAP as a beneficiary.
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• As secondary beneficiary (meaning one’s spouse is named primary beneficiary to receive retirement benefits for their life, then the institution would receive payments of those benefits.
• As contingent beneficiary (meaning that the institution would receive the benefits if the employee’s spouse predeceases him/her).
• CAP could be named as beneficiary for full benefits, for a fraction of the account, or for a stated cash amount.
• If the person is survived by descendants, the designation could be to the surviving spouse first for his/her life and thereafter the balance in the account is divided between CAP and those descendants, and/or other charities.
B. There are distinct tax savings in making testamentary charitable gifts using retirement assets compared to probate assets. Unlike other assets, retirement funds are subject to income tax when distributed, unless the funds are paid to tax-exempt charities. A good way to fund a charitable bequest at your death is by means of your retirement plan. If you are 70½ or older, naming a charity as the beneficiary of your retirement plan generally will not accelerate the required minimum yearly distributions to you during your life. At death, if persons other than the surviving spouse or tax-exempt charities are beneficiaries of your retirement funds, these funds are also potentially subject to estate taxes.
A. The disposition of IRA’s, pension, and profitsharing plans is not governed by a person’s will, but rather by the beneficiary designation forms provided by the plan itself. The participant designates on the beneficiary form who they wish to receive the retirement benefits which remain after death. A nonprofit organization such as CAP can be named as beneficiary, with the non-participant spouse’s consent. (Spousal consent is not required for an IRA, except in some states.) The designation could take several forms:
C. Much of an individual’s other assets, such as real estate, taxable investments, and business ownership are not subject to income taxes when distributed. Thus, if you have decided to leave some of your assets to charity upon death, charitable bequests funded with retirement accounts minimize taxes and enable you to pass assets to CAP without a prohibitive cost to your heirs.
• IRA holders often name their spouse or a non-spouse heir, as the beneficiary. While this can be a wonderful gift, it is important to understand the full implications of providing an inheritance like this to your loved one. For example, depending on the type of IRA:
• The SECURE Act was passed in 2020, requiring that a non-spouse heir must withdraw all funds within 10 years, potentially depleting the funds caused by tax burdens on the beneficiary.
• At death, if persons other than the surviving spouse or tax-exempt charities are beneficiaries of your retirement funds, these funds are potentially subject to estate taxes.
If you have an IRA, pension and/or profit-sharing plan account balance and you are considering naming CAP as a beneficiary, be sure to consult a lawyer or tax advisor to properly execute that designation
A charitable gift annuity (CGA) offers an attractive way to make a gift to CAP now while guaranteeing annual income when you retire or at another time of your choosing. If you need tax deductions during your peak earning years and supplemental income when you retire, the CGA is a strong option. A CGA would allow you to receive a current income tax deduction for the value of the gift minus the value of your future annuity payments.
Example:
Susan is a 55-year-old sales executive and supporter of CAP. She wants to make certain that she has sufficient annual income in retirement. To supplement her taxable investments, Susan has decided that a CGA would accomplish two of her primary objectives: to assist CAP and to provide retirement income for herself. Susan is in the 32% income tax bracket. Susan currently does not need the income that could be produced by a traditional investment of $50,000 and uses that amount to purchase a CGA. Further, she decides that she wants to begin receiving annual income from the annuity when she reaches age 68. During this 13-year period, the investment accumulates in value on a tax-deferred basis.
(Example results: back page)
The approximate results of this transaction are summarized as follows:
1. Principal amount for the CGA
$50,000
2. Number of years payment is deferred 13
3. Annuity rate
6.8%
4. Annual annuity payments beginning in 2032
$3,400
5. Amount of annual annuity payment excluded from taxes $1,895
6. Tax deduction in year of gift
$16,836
7. Current year tax savings at 32%
$5,388
*Note that this illustration assumes a rate of return that may not be applicable when an actual charitable gift annuity is established
In this example, Susan makes an outright gift of $50,000 to CAP now, when she is earning and has higher taxes. A CGA guarantees income during retirement when she will presumably be in a lower tax bracket. She has also removed $50,000 from her estate, reducing potential estate tax.
beneficiary(ies). The amount of the payment is determined by applying a fixed percentage (not less than 5%) to the trust assets, as valued each year. The payout percentage is agreed upon when the trust is established. The annual income from a unitrust fluctuates as the value of the trust assets changes, but the payout percentage remains the same. The donor may add to the trust in future years. The trust assets pass to CAP for use in our work when the donor or his other beneficiary(ies) passes away.
Example:
Situation: Jon has stock he purchased in 1996 for $20 a share. Today it sells for $200 a share. It is paying Jon an annual dividend of 2%. In retirement, Jon needs more income, but if he sells the stock, he will pay at least a 15% capital gains tax plus any applicable state income taxes on the $180 gain in price of each share since he purchased the stock. Jon’s federal capital gains tax could be as high as 20% if he is in a high tax bracket.
Solution: Jon creates a unitrust with a 5% annual payout, naming CAP as remainderman, and transfers his stock to the unitrust. The unitrust sells the stock and replaces it with assets that allow the unitrust to pay the 5% annual amount.
Advantages to Jon:
In another example, we find Jon who has reached retirement age and realizes that his investments do not yield the income he desires. Since these longterm investments have appreciated significantly in value, he will have to pay a substantial capital gains tax if he sells them.
One solution to this dilemma is a charitable remainder unitrust: A donor irrevocably transfers cash, securities, or other property to the trustee named in the instrument. The minimum value of the charitable remainder interest at the time of establishment must be at least ten percent of the gift value. A bank, trust company, other fund manager, or an individual can be listed as the trustee. The trust agreement provides that the trustee shall pay from the trust to the donor an annual payment, usually for the life of the
• His annual income from the asset has nearly tripled.
• He avoided paying immediate capital gains tax.
• Jon receives an immediate charitable income tax deduction for the present value of the trust remainder, computed based upon his age, current interest rates, and the current fair market value of the stock when the unitrust is funded.
• Jon’s income will increase if the value of the trust grows over time.
• At Jon’s death the remaining trust assets will benefit CAP.
Retirement should be a time in our lives when we can enjoy life, those we love, and aid nonprofit organizations that perpetuate our values. If we prepare well for retirement, we can indeed find that it will be the best time of our lives.
Charitable Remainder Unitrust
