In previous posts in this column we have stated that a charitable gift to us of an item of income in respect of a decedent (so-called IRD) at the death of an individual is the most tax-efficient way of benefiting our organization. Reason: Such a gift is excluded from the donor’s gross estate for federal estate-tax purposes and avoids income tax because we are a tax-exempt entity.
Probably the most familiar and prominent items of IRD are retirement-plan accounts: 401(k)s, 403(b)s, and IRAs. Such assets are funded with pretax dollars and the buildup in value is tax-free, but taxation is merely deferred, not forgiven: Income tax kicks in when distributions are made to the owner during life. At the owner’s death, the tax liability carries through to the beneficiary(ies) as they receive distributions. Thus, if the beneficiary is a tax-exempt nonprofit such as our organization, the postmortem income-tax liability is avoided.
Another far more common IRD item that many people don’t think of is gain (interest) on U.S. Savings Bonds. The interest accumulates tax-free for a period of time if the owner so elects, and income tax is due if the owner cashes in the bonds. At the owner’s death, any unrecognized tax carries forward to the beneficiary who pays the tax. However, if the owner transfers the bonds to our charitable organization by a will or a living trust, we don’t have to pay a tax on any accumulated interest. Note: The value of the bonds is removed from the owner’s estate for estate-tax purposes as well.
It is best to consult your estate-planning lawyer if you are considering such a gift because it has to be carefully arranged to achieve the desired tax benefits.