Did you know you can name the Central Park Conservancy the beneficiary of a life insurance policy, a bank or brokerage account, or an individual retirement account (IRA)? These gifts can usually be accomplished by simply contacting your insurer, bank, or broker, asking them for a beneficiary form, and designating the Conservancy as the recipient of all or part of your insurance policy's death benefit or your bank or IRA account balance. And if circumstances change, your beneficiary designation can be amended at any time—so you retain complete control of your assets during your lifetime.
Tax deferred retirement accounts often make up a significant percentage of many estates. Such plans include individual retirement accounts (IRAs), 401(k) plans, 403(b) plans, and profit-sharing KEOGH plans. Most retirement plans are made up of assets which are not taxed so long as the assets remain within the plan.
One reason that retirement accounts are often overlooked as charitable gift options is that they are seen as quick and easy methods of transferring wealth to loved ones. However, from a tax perspective, retirement account assets are often not the best assets to leave to your family.
If your children or your estate are named as beneficiaries of retirement plan assets, these assets will be subject to both income taxes (to the recipient) and estate taxes (to the estate). This combined income and estate tax burden can be substantial, greatly reducing the value of the intended gift. On the other hand, retirement account assets transferred to the Conservancy, for example (via a simple beneficiary designation that can be changed at any time), will not be taxed as income to the Conservancy (charities are tax-exempt) or taxed as part of your estate. Thus, if you have incorporated gifts to family and charities in your estate plans, you may want to consider making charitable gifts with retirement account funds and giving appreciated stock, real estate, or other assets to children, which will not be taxable as income to them.
Bank / Stock Accounts, and Donor Advised Funds
Bank and stock accounts and donor advised funds may also name a charity as beneficiary of all or a portion of the account's proceeds through a simple beneficiary designation, which can be changed or revoked at any time. Since the donor retains ultimate control of these accounts until death, no current year income tax deduction is generated by such designations. However, upon the donor's death, the bank or brokerage firm will transfer the account (or make a lump sum grant from the donor advised fund as directed by the owner) into the designated charity's name or, upon request, close the account and issue a check to the charity.
There are any number of ways to use life insurance for charitable purposes.
Donor names charity as simple beneficiary of donor's life insurance policy
What happens: Donor retains access policy cash and dividends, and ability to change beneficiary. Charity receives death benefit or portion thereof at donor's death.
Tax consequences: No income tax deduction or other benefit for donor since ownership of policy not transferred to charity.
How it's done: Simple execution of a change of beneficiary form by donor. Donor pays premiums.
Donor buys a new policy and makes charity owner and beneficiary
What happens: Donor relinquishes control of policy and has no access to cash value that builds. Charity retains rights to cash value of policy and death benefit at donor's death.
Tax consequences: Donor will receive income tax deduction for any premiums they continue to pay. If charity picks up the payment of premiums, no tax deduction to donor.
How it's done: Apply for policy naming charity as owner and sole beneficiary; donor gifts premiums to the charity or charity makes premium payments.
Gift of an existing policy (paid up or with premiums due) to charity, making charity new owner and beneficiary
What happens: Where the life insurance is no longer required to meet personal needs of donor, policy ownership can be transferred to charity as new owner. Donor no longer has access to any cash value or dividends from the policy, and relinquishes full control of policy to charity.
Tax consequences: Donor will receive an income tax deduction for the lower of policy's cash value or the net premiums the donor has paid; donor also receives an income tax deduction for additional premium gifts paid.
How it's done: Change ownership and sole beneficiary status to charity; donor gifts the premiums to the charity or charity makes premium payments.