Revocable v. Irrevocable Trusts

Over my career in working with individuals on estate planning I often get asked about trusts.  “Trust” is a buzzword that often implies an individual has done thorough estate planning.  The person feels good about it and conveniently forgets about the planning over time. But what is a trust and what is it supposed to do for an individual?  This month’s article focuses on that question to remind people that a trust’s purpose should be reviewed regularly and should be given serious consideration at the beginning before implementation.


A trust has three basic individuals who play key roles in the operation of a trust.  One person might fill all three roles, or three individuals can each fill a role.  Those roles are:

Grantor—the person who establishes the trust, and usually names the other individuals, as well as the terms of the trust.

Trustee—the person appointed to carry out the terms of the trust and to protect the beneficiary to be sure assets are secured.  More than one trustee can be appointed by the Grantor.

Beneficiary—the person who receives the assets under the terms of the trust.  The beneficiary might receive assets over a period of years, or upon completion of certain conditions, or both.  Multiple beneficiaries may be named by the Grantor and in differing percentages.  Each beneficiary may be subject to different conditions to receive the assets, too.

The final step in establishing a trust is to contribute property to a trust.  Without property, a trust has no value or purpose because the trustee has nothing to take care of and the beneficiary has nothing to receive.

If you are interested in discussing these ideas further, please contact our office to set an appointment.  We look forward to seeing you and hope all is well with you until then.   Thank you.

Types of Trusts

A trust is either revocable or irrevocable.

Revocable Trusts

A revocable trust is commonly used for living trusts.  An individual seeking to protect assets in a trust may utilize a revocable trust and later terminate the trust, if the trust’s purpose has expired or the Grantor determines that the trust is no longer useful.  Then all assets may be distributed back to the Grantor from the trust and the trust is dissolved.

The most common reason for establishing a revocable trust is to place property in a legal entity (i.e., the trust) to avoid probate.  Probate can be time consuming, expensive, and public.  Using a revocable trust to hold property means that the trust property is not subject to property and has already been transferred to potential heirs under the terms of the trust.

A revocable trust usually finds the Grantor naming him/herself as the trustee and beneficiary while alive, but then naming successors as trustees and beneficiaries upon the Grantor’s death.  The trust then continues to exist and the successor trustee simply manages the property on behalf of the beneficiary.

Irrevocable Trusts

An irrevocable trust is commonly used to shed property from an individual’s ownership and control.  Why might an individual want to avoid ownership and control?  Believe it or not, there are multiple reasons.  The most common is to avoid estate taxes.  A wealthy person who owns an estate in excess of approximately $5.5 million in 2018 would find their estate subject to estate taxes upon their death.  One way to decrease the value of their estate is to move property from the individual to an irrevocable trust.

The second reason for using an irrevocable trust is to remove all property owned by an individual such that the individual would qualify for public medical assistance if entering a nursing home or other long-term care facility.  There are multiple other laws surrounding this type of planning that are not addressed by this article.  It is advisable to seek professional assistance if this idea is of interest to you.

Common Uses of Trusts

Revocable Living Trusts

This type of trust was mentioned earlier.  Most estate planning seminars address the use of RLT’s as a common replacement for wills.  They should not be considered to be so.  Often an individual has property in his/her own name as well as property in the RLT.  But if the individual still has property in his/her name, a will is still necessary as that  property will be subject to probate.  But the probate will likely be greatly simplified, with less cost, and publicly available only to the probatable property.  The RLT property will retain privacy and will bypass probate.

Irrevocable Life Insurance Trusts

An ILIT is often used by an individual to provide cash to pay for potential estate taxes.  The ILIT holds a life insurance policy that is funded by the individual, usually with annual premiums.  ILIT’s are unique because contributions are subject to the gifting rules under the federal Internal Revenue Code.  Beneficiaries of the ILIT are to given the opportunity with each annual contribution to take their share as a gift, although they usually do not.  Something called a Crummey Letter (named after a well known district court case) must be issued to the beneficiaries each year alerting them to this opportunity.

Charitable Trusts

Charitable trusts are generally irrevocable and may be named charitable lead trusts or charitable remainder trusts.  A charitable lead trust provides a charitable contribution initially to a tax-exempt nonprofit organization, with anything left to go to named beneficiaries.  A charitable remainder trust does the opposite, where the beneficiary is taken care of first, and anything left goes to a charity for its use.


This article intends to simply provide initial basic information on trusts for individuals unfamiliar with such legal tools.  Trusts of all types have other features and responsibilities not addressed in this article due to space and knowledge level restraints.


This article does not intend to provide any tax or legal advice but suggests that you contact an appropriate professional to consult with on your specific situation and whether these ideas meet with your goals and objectives.

Medicare Cost Plans Terminating

April 18, 2018

The weather is getting warmer, finally.  And hopefully taxes have been paid for 2017.  As we enter the middle part of 2018 news that may affect you has been issued by the health insurers in Minnesota.  The Medicare Cost plans offered to individuals as Medicare supplement plans are slated to be terminated effective at the end of 2018.  Termination of these plans stands to affect 400,000 individuals who currently carry such coverage and rely on it to  pay for medical care when Medicare Parts A and B do not.    For a broader understanding of this issue, please read the following.

To read further articles on estate planning from prior months, check out my blog at

Medicare Cost Plans

As everyone likely knows, Medicare coverage offered through the federal government is available to individuals who attain age 65.  But Medicare does not cover every medical expense.  In fact, Medicare comes with significant deductibles and co-pays that require individuals to pay for medical expenses out of their own pockets.  To offset such out-of-pocket expenses, many individuals opt for Medicare supplement plans.  These plans come in various designs with different types of coverages to choose from.

One of the most cost effective plans is known as the Medicare Cost plan and is offered through the major insurers in Minnesota including Medica, Blue Cross, and Health Partners.  The Cost plan generally allows an individual to have coverage if staying within a given network of physicians, clinics and hospitals. Going outside the network would void coverage, which is the situation that allows the insurers to strictly contain costs.   If individuals go outside the network there would be not Medicare Cost coverage, but only that coverage provided by Medicare Part A, B, or D.

These plans have been significant in the rural areas of Minnesota because rural clinics and providers generally would generally be the only providers thus offering an exclusive market to the insurers.  Medicare has generally been willing to assist with funding these plans, although not all states carry Cost plans making them an unusual, innovative way to offer coverage in Minnesota.  But they have not been cheap to maintain and changes are happening.

The Medicare program through the Center for Medicare Services (CMS) issued an alert earlier this year that Cost plans would no longer be recognized as of January 1, 2019.  This leaves Minnesotans who depend on such coverage, especially those in the rural areas, without a supplemental type of coverage.  While other supplement plans are available, they are generally more expensive and potentially unattainable for individuals on Medicare.

I have been contacted by insurance agents who are available to help with this gap in the market.

I am not licensed as an insurance agent nor do I promote any particular agent or company for insurance products.  What I can do is help with understanding the applicable law on this topic and discuss other possible options available.

If you are currently enrolled in Medicare Parts A, B, and D, and you wish to discuss the issue of Cost plans being terminated, please contact me.  There may be other options for youwhich you are eligible.

Avoiding Probate

March 7, 2018


Studies on estate planning routinely show that avoiding probate is one of the top goals for people.  Probate, that court process that historically provides for the transfer of a decedent’s property to heirs, is regularly seen as costly and time consuming.  The costliness often comes about because filing with a probate court often involves an attorney’s assistance, and of course, the attorney rarely works for free, and usually works for fees that can be significant.  The idea of the probate process being time consuming arises because the court, or a probate registrar, often must review documents and make a ruling, then issue its order.


Sometimes probate is necessary.  It’s a topic we will discuss next time.  Today, we will address the four basic ways to avoid the probate process in passing property to heirs.  In summary, the four ways to avoid probate are: 1) beneficiary designation, 2) joint tenancy, 3) trust ownership, and 4) affidavit of collection of property for small estates.  Let’s look at each of these briefly.


Beneficiary Designation


Naming a beneficiary for property allows for the property to transfer automatically to the beneficiary.  Commonly, the property with a named beneficiary would include life insurance, qualified retirement plans (e.g., 401k plans), bank accounts, and investment accounts.  In recent years, Minnesota law has been changed to allow for a transfer on death deed for a primary residence, which follows a similar concept as naming a beneficiary.


The major drawback to naming a beneficiary is that the beneficiary may not out live the decedent owner.  If the beneficiary predeceases the owner, and no successor beneficiary is named, the property may still need to be probated as it goes back to being simply part of the decedent’s estate, and the court now governs as to who controls such property.


A second drawback involves the idea that a named beneficiary may be outdated at the time of the owner’s death.  For example, if a person is divorced but the ex-spouse is named as the beneficiary of a life insurance policy, the beneficiary designation might not be what the decedent intended.  While it may be subject to challenge in the court, often the named beneficiary will prevail.  Court cases have been ruled on either side of this issue and usually come down to an analysis of the individual facts of the case.


Overall, a beneficiary designation can be a quick, simple way to transfer property.  Registration must be made with the sponsoring organization.  For example, the insurance company will require its beneficiary form be completed to name a beneficiary.  And upon death of the insured, the insurance company will generally provide the insurance proceeds to the beneficiary.




Joint Tenancy


Joint tenancy is the concept that involves property ownership by more than one individual.  The common example of joint tenancy is a husband and wife jointly owning a bank account.  Upon the death of one of the parties, the surviving party becomes the owner of the account.


Joint tenancy is not restricted to spousal situations. Business accounts or family accounts often are held in joint tenancy, too.  Therefore, if siblings jointly own property, there may be several individuals who continue to own the property even after the death of one of them.


The major drawback to a joint tenancy arrangement is the dissatisfaction with the co-tenants by the individual prior to his death, and the desire not to leave such property to such co-tenants.  But this situation is one that involves further planning and regular monitoring of the estate plan.


Upon the death of one of the tenants, account titling should be updated with the sponsoring organization (e.g., the bank) to keep a listing of co-tenants updated.


Overall, joint tenancy is, again, a relatively easy, quick and cost efficient way to transfer property from a decedent’s estate to survivors and heirs.


Trust Ownership


Trusts have been discussed in previous editions of these blogs, so I won’t go into specific details about trusts.  But a trust is recognized as a separate legal entity that owns property and is managed by a trustee.  If an individual dies, the trust continues to survive and to own the property subject to the terms of the trust.  While the decedent may have been the trustee, and a new trustee will need to be named, the trust itself continues to exist after the individual’s death.


A drawback of a trust might depend on the type of trust and its ultimate purpose.  If a trust is irrevocable and the grantor, i.e., the person establishing the trust, does not favor the terms of the trust, it may be too late to fetch the property upon its transfer to the trust.  In addition, a named trustee, or successor trustee, might fall out of favor after being named to the trustee position and not act as the grantor might want the trustee to act.  Still, those are issues that can be addressed by thorough drafting and diligent addressing of the necessary concerns.


A trust, while perhaps more costly on the front end of the estate planning process while the property owner is alive, offers great flexibility and can be a significant tool in long term planning when transferring property to heirs.


Affidavit for Collection of Property


The final method to avoid probate is the utilization of an affidavit for collection of property.  This affidavit may only be used for estates with less than $75,000 of total probateable worth.  So if an individual owns minimal property, defined under Minnesota statute as less than $75,000, no will would need to be probated.  An affidavit could be used instead.


The drawback to the affidavit is that if an heir should contest how the property is to be transferred (usually to another heir), a contest would not be easily addressed with an affidavit.  A will would still be the best way to clarify who is to receive property from an estate.  For example, if three children survive their deceased parent and a bank account with $50,000 remains for the estate, one child might be able to present an affidavit to the bank and collect the property before the other children act.  Dividing the account evenly three ways, if that’s what the parent probably wanted, might get difficult.


Overall, the affidavit is intended as a final, simple solution to transferring minimal property to heirs, and has been viewed to be effective over the years.



These four methods can all be used in varying degrees with larger estates to serve the property owner and to meet the goals of the planning process.  Each of them has its attributes and negatives.  But used properly, an individual can design an efficient, cost-effective estate plan.



This article does not intend to provide any tax or legal advice but suggests that you contact an appropriate professional to consult with on your specific situation and whether these ideas meet with your goals and objectives.

Estate Planning– Charitable Trusts

October 31, 2017

As we enter the final two months of the year, many people often think about their charitable intentions for the year.  Often the gifting may be simply a cash donation to a favored entity or for a preferred cause.  The charitable intent often only goes with the particular year and is a simple transaction without further ado.


But occasionally, individuals seeking to do more for a favorite organization are introduced to advanced planning ideas that give rise to a very efficient use of personal assets.   Some of these ideas include the following:


  • The first idea involves an asset currently in use by the donor. But the income generated by the asset is sufficient to satisfy the donation while the donor is alive.  The asset can then be designated to be bestowed upon the charity at the donor’s death.


Previous articles have addressed beneficiary designations and will bequests.   Those are methods without concern for current tax deductibility and they tend to be simple plans to design and implement. This article will not dwell further on such plans because our sample donor does want current tax deductibility.


  • The alternative idea to beneficiary designations or will bequests, is to devise a trust for the donor. The trust allows a most efficient use of the asset.  The asset’s income may still be used by the donor while alive and the asset can then go to the charity.  But the difference becomes important when the donor gains a current deduction for the contribution of the asset to the trust.  The deduction becomes important if the donor wishes to offset significant income for the current year.


For example, assume Joe Generous owns stock in a company that generates a dividend each year.  But Joe wishes to ensure an annual contribution to his favorite charity, Good Deeds Done.


As a way to utilize the stock’s important dividend, Joe agrees to establish a charitable trust and to contribute the stock to the trust.   The trust is then established as an irrevocable trust, meaning that Joe can never reverse his decision to donate the stock.  Upon contribution, the stock will now be held in the name of the trust, not in Joe’s name personally.


This distinction of the legal entity holding the stock is what allows for Joe to have a deduction for the current year for the entire worth of the contributed stock.


The stock will be held by the trust for the duration of the Joe’s life.   And during his life, Joe may continue to receive dividends from the stock as income.  But Joe no longer controls the stock.  The trust, and its fiduciary, the trustee, controls the stock.  The trustee will vote the shares of the stock for the company to which the stock belongs.


At Joe’s death, the trust is instructed to release the stock to Good Deeds Done, the charity.    The charity, now in control of the stock, may retain or sell the stock as it determines the best course of action.


This idea is known as a remainder charitable interest because the donor gets the first benefit from the asset and the charity gets the remainder interest in the asset, usually after the death of the donor.


  • The inversion of the charitable remainder trust is the lead charitable trust. As one might anticipate, a lead trust finds the charity receiving the first benefit from the trust.    The remainder benefit, again, often at the death of the donor, may find the asset going to a third party, perhaps heirs of the donor.


If the remainder interest does not go to a charity, no current tax deduction is permitted to the donor.  However, the asset is considered to have been removed from the donor’s final estate because it is now part of the irrevocable trust.


If you are interested in discussing these ideas further, please contact our office to set an appointment.  We look forward to seeing you and hope all is well with you until then.   Thank you.


This article does not intend to provide any tax or legal advice but suggests that you contact an appropriate professional to consult with on your specific situation and whether these ideas meet with your goals and objectives.

Beneficiary Designations

July 28, 2017


Estate Planning- Beneficiary Designations

Beneficiary designations have been points of dispute since their appearance on the estate planning stage over 100 years ago.  Certainly, the ability to name a beneficiary for an account, or an insurance policy, or a brokerage account can be an immense time saver and efficient use of paper.  On the other hand, if a situation becomes more complicated or the account holder’s goals are more complex than naming a simple beneficiary, the beneficiary designation form may not suffice.

This article will review some of the basics of naming beneficiaries and will then offer an overview of more complex situations and some alternatives to naming beneficiaries.

Naming Beneficiaries

Most situations are ideally suited to the simplicity of naming beneficiaries.  An individual wants to name a spouse as beneficiary of a financial product and it is done.

Even the bit more complicated situation of an individual who wishes to name multiple beneficiaries remains relatively easy for all involved.  For example, if an individual has three adult children who are competent, the individual simply names the individuals as beneficiaries.

The situation becomes murkier when a potential beneficiary might not be eligible or may not want the benefits.  For example, if a spousal beneficiary is on medical assistance, it may not be in the best interests of the individual spouse to be named as a beneficiary.  Other solutions should be sought.

If an individual wishes to name his children as beneficiaries but one of them is in rehab for drug addiction, that child should probably not be a named beneficiary.  Other solutions should be sought.

If an individual wishes to name multiple beneficiaries but not in equal shares, complications might ensue.  To try to adjust percentages to be 50, 30, and 20 for three beneficiaries sounds easy, but it adds another layer of complexity to the process.  Other solutions should be sought.

If an individual wishes to name multiple primary beneficiaries and then contingent beneficiaries, this can usually be easily accomplished.  But if one of the primary beneficiaries becomes unfit to be a beneficiary due to death or some other circumstance, is it understood that the contingent beneficiaries will likely still not receive any interest in the property?  Other solutions should be sought.

If an individual wants to name a beneficiary of a large amount of money but the money is to be given over a period of time, then a beneficiary naming might not be the best method to accomplish this goal.  Other solutions should be sought.

Other Solutions

As noted in the examples above, other solutions usually come into play when the individual wants to do something different from the straight forward naming of a beneficiary.  And of course, there can be any number of reasons for wanting to bequeath property in a manner that is different from a direct gift.  What other solutions exist?

  • Naming an heir in a will. Drafting a will is probably the easiest and gives the most latitude in describing how an heir should receive property.  Wills have a bad reputation for being expensive and involving an attorney for drafting purposes, but the engagement of professional counsel often helps keep the cost down rather than inflate it because the situation will be set up properly on the front end, eliminating confusion and problems at the time of actual distribution.
  • Establishing a trust. We have discussed trusts and their uses in previous newsletters, so I won’t get into the details of a trust, other than to offer that a trust provides significant flexibility in the estate planning process.
  • Establishing a business entity to gift portions of ownership in the business to the heir. A business entity such as a corporation, or more commonly, a limited liability company, can hold property and then percentages of ownership of the LLC may be gifted to certain individuals.  This gifting can be done inter vivos, while alive, or through a will to be executed upon death.

These are some situations for your consideration in your estate planning process.  As always, if I have not seen you in the past 3-5 years regarding any planning we have done previously, I would urge you to contact me to review.    There may be changes in your life that require changes to your planning.

If you are interested in discussing these ideas further, please contact our office to set an appointment.  We look forward to seeing you and hope all is well with you until then.   Thank you.

This article does not intend to provide any tax or legal advice but suggests that you contact an appropriate professional to consult with on your specific situation and whether these ideas meet with your goals and objectives.

Estate Planning- How Does the Estate Tax Work?

It’s been an interesting year to-date from a number of perspectives when considering estate planning in Minnesota.  The Minnesota legislature recently adjourned and the U.S. Congress continues to review laws that might greatly affect the estate planning process.  Listed below are a few of the important rules that have either survived another session, have been changed, or might still be amended in the near future.


As a cautionary point, I have greatly simplified some of the information stated below to give the reader a beginning point on understanding estate taxes.  To find a more precise expectation of your potential true value of your taxable estate, please seek competent professional guidance.  Many other factors come into play in calculating the estate tax discussed below that are not addressed in this article..


Minnesota Legislature


  1. Adjustment of the Estate Tax- The Minnesota legislature recently passed a bill to raise the estate tax exemption limit to $3 million.  Currently the limit is $1.8 million and is scheduled to increase to $2 million in 2018.  The exemption limit excludes estates from paying a tax until the value of an estate exceeds the limit.  For example, if a person dies with an estate valued at $1.5 million, no state estate tax would be due.   But if a person dies with an estate valued at $2.5 million, an estate tax would be due to the state of Minnesota.  So, when the Minnesota legislature passes a bill to raise the exemption limit, it’s a tax reduction for more people in Minnesota, generally.


An important note that should be understood, the Minnesota estate tax, when applicable after the $1.8 million is exceeded, ranges from 10-16% based on the size of the estate.  The top  rate applies at about $110 million.  So Prince’s estate, estimated at $225 million, will pay 16%, on most of his estate.  An estate valued at $5-10 million would pay closer to the 10% amount.


Statistics seem to indicate that less than 2% of estates in Minnesota actually pay an estate tax, indicating that this might be seen as a tax break for the rich.  Given that 98% of estates pay no estate tax, meaning the decedent held assets that were valued at less than $1.8 million, it seems a fair comment on the tax break.  Still, an estate worth $1.8 million is hardly a large estate either.  Estimates indicate that the Minnesota estate tax will generate about $161 million for the state coffers,   Total tax revenue from 2014 of all taxes, income, sales, estate, property, equate to about $21.5 billion, meaning that the estate tax is a pretty small portion of the overall revenue generated.


To raise the limit to $3 million would seem to only exempt another portion of the relatively wealthy.  But the response is that it is well understood that only about half the people in the state actually pay any income tax.  So the top 2% probably account for a significant portion of the tax collected by the state.   In some respects, why shouldn’t the top 2% (or some portion thereof) get the tax break?


The use of the estate tax is a philosophical debate that won’t be settled in this article, nor will the author take a side.  Instead, the attempt is simply to present as much practical information as possible to encourage the reader to consider a viewpoint that is balanced and fair, in whatever context the reader believes is just.


To bring you up-to-date on the legislature’s passing of the increased exemption, Governor Dayton vetoed the bill, so, the exemption amount remains at $1.8 million for 2017 and $2 million in 2018.  However, with the other bills that were vetoed by Gov. Dayton, it is likely that another special session may be in the near future and the estate tax subject may yet be adjusted from its current level.


Federal Estate Tax Limits


In a separate but related discussion the federal estate tax exemption limit is also currently being debated, but by the national Congress.  President Trump’s tax proposal intends to eliminate the federal estate tax entirely.


Currently, an individual who dies in 2017 and leaves an estate worth less than $5.49 million would not find any tax owed to the federal government.  For estate amounts greater than the exemption limit, the tax brackets ranges from 18 to 40%.    So the person’s estate valued at $5 million would pay no federal estate tax.  The estate valued at $10 million would pay a federal estate tax on the amount of $4.51 million (the amount exceeding the exemption limit of $5.49 million).    In either circumstance, a state of Minnesota estate tax would also apply.  (See the discussion above on the Minnesota estate tax.)


Again, the estate tax generates a very small portion of the overall revenues coming in to the federal treasury.  This means that most of our estates will not pay estate taxes under current rules.  The total eradication of the estate taxation seems to favor those with larger estates. But, as with the state tax situation,  most of the taxes paid are done so by those same people.  It’s the same philosophical argument that was addressed in the discussion with the state, although the numbers change.  The concepts remain nearly identical.


As an update, currently, President Trump’s tax bill is being debated in Congress.  It will likely be several months before any resolution will be completed and numerous revisions and amendments will probably occur before then.   We will continue to update you as events change.  But for now, it is enough to know some of these basics regarding the estate tax.


Application of Understanding Estate Taxes to Your Situation


How does this information affect your situation?  If estate taxes are a concern because you own property that might launch your estate into a taxable area, there are numerous planning techniques that can be employed to bring your estate’s total worth back into the exemption zone.  But for the most part, these techniques must be implemented before your death.  But if you own stock or real estate or some other asset that might escalate in value quickly, it is important to have done proper planning for these contingencies.


The final point in applying this information to your situation is to review your situation regularly and consistently.  If you have had any major changes in your life such as children becoming adults, grandchildren being born, new marriages or divorces, a spousal death, the death of an heir, or a dramatic change in value of any or all of your assets, it is important to review your estate situation. If your goals have changed since you last reviewed your situation, you should meet with a professional to address these changes.


If you are interested in discussing these ideas further, please contact our office to set an appointment.  We look forward to seeing you and hope all is well with you until then.


This article does not intend to provide any tax or legal advice but suggests that you contact an appropriate professional to consult with on your specific situation and whether these ideas meet with your goals and objectives.

Ideas for Transferring IRAs and 401k’s

Beneficiary Designations And How to Gift to Charities Most Tax-Efficiently

When doing estate planning, the issue of gifting to favorite charities often arises.   Is there a best way to contribute to a non-taxable charitable entity, such as a church, a school, or some other organization that has been granted non-profit, tax-exempt status?   In fact, there are two ways to contribute to a charity that may be more advantageous from a tax standpoint.

First, it must be clear that the very nature of the question involves analyzing your accounts subject to tax and those that are deemed “after-tax”.  A taxable account, a.k.a. a qualified plan might include retirement plans through your employer or an IRA.

IDEA #1:

An individual who designates assets that are after-tax, such as brokerage account investments, to a charity will certainly accomplish the goal of gifting funds to the person’s favorite non-profit entity.  However, it should be considered whether it is better to name a non-profit entity or another individual  of a qualified plan, such as an IRA[1], is drafted to be the charitable organization, it would be a more efficient use of dollars.  Here’s why: Let’s say the IRA holds $100,000.   If this amount is transferred at the individual’s death under the beneficiary designation to the charity, then the charity receives $100,000 with no taxes owed.  The full gift is $100,000.  If $100,000 had been given to an heir or another individual, taxes would be owed, perhaps as much as 40%, leaving the gift to the individual at $60,000.  A loss of $40,000 to taxes would be incurred.  Clearly, a tax qualified plan naming a non-profit entity as beneficiary would be a more efficient use of dollars.

IDEA #2:

A living individual who is at least 70-1/2 years of age must take a portion of the qualified plan account each year under current tax law.  This amount is called a Required Minimum Distribution (RMD).   Tax law also permits such an individual to take his RMD but transfer it directly to the charity and have it qualify as the actual RMD.  No tax will be owed by the individual, nor, of course, will tax be owed by the charity. So for example, an IRA holding $100,000 might require an RMD of $8,000 in a particular year.  Donating this amount directly to the charity passes the amount tax-free, rather than subjecting the amount to the individual’s tax bracket. It becomes a much more tax-efficient use of contributing the $8,000 by donating it directly to the charity.


Taxes are an important consideration when moving money.  But taxes can be weighed against other factors.  Either of these ideas require an administrative process that allows for the easy transfer of funds.   If naming beneficiaries in a qualified plan and expecting the plan administrator to timely contact the charity about its beneficiary designation.  Unless, the charity knows of its designation in advance, and then has knowledge of the death of the individual, such beneficiary designation may never be consummated by a transfer of funds to the charity.

A second factor to consider is the tax bracket of the individual who might otherwise receive the funds.  If that person is in a low tax-bracket, say 15%, the advantage may not be significant.

Another factor to consider would be charitable intent.  If the individual participant in the qualified plan wants all funds to go to family and friends without any funds going to charity would not be interested in ideas such as those outlined above.

Finally, it should be remembered that with nearly all financial ideas, the benefits can be parsed to the degree desired.  For example, if the individual only wants to name a charity to receive $25,000 of the $100,000 IRA, then the charity would be designated to receive 25%, or that specific dollar amount.  The remainder could then be left to the individual’s heirs.

If you are interested in discussing these ideas further, please contact our office to set an appointment.


This article does not intend to provide any tax or legal advice but suggests that you contact an appropriate professional to consult with on your specific situation and whether these ideas meet with your goals and objectives.

[1] A qualified plan means the plan holds funds that are “tax-qualified” such that taxes are still to be owed those funds.  Qualified plans generally include IRA’s, or employer-sponsored retirement plans such as 401(k)’s, profit sharing plans, or other types of defined contribution plans under the Internal Revenue Code.