December 2, 1999 | Read Time: 10 minutes
Fund raisers urge donors to make bequests of tax-deferred savings
Two years ago, a member of St. Paul’s Episcopal Church, in Cleveland Heights, Ohio,
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told officials at St. Paul’s that she had named the church as the beneficiary of her retirement plan.
The woman wanted to leave money to the church, but she also wanted to minimize the taxes paid on her estate. If the money in her pension account — now valued at about $150,000 — were to go to her children, it would be hit with both income and estate taxes. St. Paul’s, on the other hand, will get the money tax-free.
The news of the bequest was a revelation for the church’s director of stewardship and gift planning, Lael Carter. Though she had never thought about soliciting donations of retirement-plan assets, the donor’s announcement led her to start telling other donors about how they, too, could leave money from their retirement plans — such as I.R.A.’s, 401(k)’s, and other pension accounts — to the church when they died.
Ms. Carter is one of many fund raisers around the country who recently have identified what they see as a potential gold mine for their charities: the more than $11-trillion that is estimated to be held in retirement accounts.
“There are huge assets in these plans,” she says. “We can’t afford to ignore that — and neither can the donor.”
So far, two other church members have made St. Paul’s the beneficiary of their retirement accounts — one of which is expected to be worth at least a quarter of a million dollars by the time the church receives it. And many others are considering whether to bequeath their pension assets, too, Ms. Carter says.
Bequests from retirement-plan accounts have long been an attractive way for donors to give money to their favorite causes because the tax advantages can be considerable.
Although the contributions to, and assets in, many kinds of retirement plans are not taxed, withdrawals and distributions — whether to the people who own the plans or their heirs — are. That means that any money in tax-deferred plans that is left to an individual’s heirs can be subject to both income and estate taxes that, in some cases, can erode up to 80 per cent of the funds. If the assets are instead passed to a charity when an individual dies, however, no taxes are levied and the full amount goes to the non-profit group.
Fund raisers, financial advisers, and estate planners around the country say that because of the tax consequences, a growing number of donors are choosing, when they can afford it, to bequeath to their children other, less-taxable assets — such as cash and stocks — saving all or a part of their retirement plans for charity.
And more and more charities are promoting such gift giving, too, as fund raisers recognize that the enormous stock-market gains of recent years have increased the retirement-plan assets of many affluent and middle-class savers beyond their ability to spend the money in their lifetimes. In some cases, tax-deferred retirement accounts represent the largest single asset in a person’s estate.
“The lure for us is obvious,” says Michael C. Perry, director of development at Deerfield Academy, a Massachusetts private school that plans to step up its marketing of retirement-plan bequests. “If you look at the money out there, you know there is going to be plenty of money left in those accounts. Our job is to get people to see the benefit of giving to charity, along with providing for their children.”
The idea of donating retirement funds has also generated a good deal of public attention in the past two years as charities have been lobbying Congress to change federal tax laws that impose stiff financial penalties on people who try to give pension money to charity while they are still alive. Although so far unsuccessful, charities plan to continue to press for the removal of those penalties.
Some charity leaders are also considering asking Congress to change a lesser-known provision of the laws governing the distribution of retirement-plan assets that may even discourage after-death gifts. In the meantime, the lobbying efforts have put a spotlight on retirement plans as a largely untapped source of contributions before and after a donor’s death.
No national data exist to quantify the amount of retirement money Americans have set aside for non-profit groups. In many cases, fund raisers say, charities themselves do not know that they have been named as a beneficiary to a retirement plan. In addition, it is difficult to say how much a donated plan will be worth when it goes to charity since the value depends on the performance of the investments in the account, how long the donors live, and how much of the money they might withdraw during retirement.
The California Community Foundation, in Los Angeles, which began promoting contributions of retirement-plan assets three years ago, already anticipates taking in as much as $100-million over the next 20 to 50 years from such gifts.
But, says Peter Dunn, the foundation’s director of gift planning: “We really have no idea, especially because we don’t even know what some of the plans are worth now, let alone in 10, 15, 20 years. All we know is that if we keep educating people about the possibilities, there’s going to be a windfall.”
At Harvard University — one of the first institutions to promote the idea of pension-plan bequests eight years ago — Charles W. Collier, senior philanthropic adviser, says it is impossible to predict how much money the university will receive from such gifts. He says that he knows of at least a few dozen donors who have named Harvard as a beneficiary of their plans but that there are probably dozens more.
“I can only confirm many millions of dollars in designations,” Mr. Collier says. “This is not an exact science, but we know it will be a lucrative one.”
Harvard, which used to pitch the retirement-gift idea only to its oldest and most-generous donors, broadened its promotions last year, sending out information to 30,000 alumni who were not identified before as potential donors of retirement assets.
Plenty of other non-profit groups are reaching out to donors for the first time, too.
* At Deerfield Academy, Mr. Perry is considering sending special letters once a year to the school’s alumni — starting with the graduates who are turning 65 — to tell them about estate-planning issues, particularly calling attention to giving options related to retirement plans.
* In October, the Girl Scouts of the USA introduced the idea of pension-account gifts to fund raisers at local Girl Scout affiliates around the country in its planned-giving newsletter. The national organization also plans to add material about the subject to its training seminars for fund raisers.
* At the public-broadcasting station Thirteen WNET New York, fund raisers plan to enlist board members to write guest columns about retirement-plan gifts in the organization’s newsletters and program guides.
* The United Way of America, the umbrella organization for the nation’s 1,400 local United Ways, is making pension accounts a focus of the planned-giving seminars it conducts for United Way fund raisers. Ed Johns, the national group’s top planned-giving official, says that because United Ways run charity drives for many companies, the organizations have a special opportunity to tap into employees’ retirement plans.
“We’re not talking about just getting the message to top executives with significant wealth in their plans,” Mr. Johns says. “There are companies out there with hundreds of employees with plans in excess of $1-million each. That represents a huge potential pool.”
Estate gifts of retirement-plan assets can take a variety of forms. They can be made outright, naming charities as the beneficiary of all or a portion of a plan. Or they can be made to a donor-advised fund operated by a charity, thus giving donors’ children an opportunity to recommend how the money is spent. Donors can also leave money from plans to a charitable remainder trust that would make annual payments to their heirs before the remainder of the trust’s assets, after a certain period of time, passes to a charity.
While donors may also give money from their retirement plans to charity before they die, few do. Some people are wary of such gifts because they are unsure about their financial needs during retirement. Others shy away from gifts from their pension accounts made during their lifetimes because of the withdrawal penalties and taxes they will face.
Under federal law, Americans may withdraw funds without penalty from most kinds of retirement accounts only after they have reached the age of 59½. And even then, people are subject to income tax on the amount taken out, even if they give the money immediately to charity.
In September, President Clinton vetoed a tax bill that included a provision — known as the I.R.A. charitable rollover legislation — that would have allowed people age 70½ and older to make tax-free withdrawals from individual retirement accounts for donations made directly to charities. Earlier versions of the provision would have gone even further than the one that was vetoed, giving the tax-free-rollover option to younger donors and allowing donors to use the money for charitable remainder trusts, not just outright gifts.
With careful and sometimes complicated planning, gifts of retirement assets can be made during a donor’s lifetime and cause little or no extra tax burden. But many charity leaders say they will continue to press for changes in the law to make such gifts an easier and more attractive option.
Fi Choate, a financial planner from Hays, Kan., says she, for one, would give a lot more to charity today if the tax laws were changed. She and her husband named Fort Hays State University — where her husband has been a professor for nearly 30 years — along with four other non-profit groups as beneficiaries of five accounts that are now worth a total of about $900,000. But in the meantime, she says, she and her husband can afford to donate only $2,000 to $3,000 a year to charity.
“Let’s face it, it’d be nice to make a big splash of a gift while you’re still alive,” says Ms. Choate. “You feel good. You get credit for it. But that just doesn’t make sense for us taxwise.”
Ruth Heffel, director of planned giving at Fort Hays State’s Endowment Association, which raises money for the university, says that she is hearing from more and more donors like the Choates who say that their retirement plans account for the biggest share of their assets.
“It’d be nice to think all that money could be available for our capital campaign today,” says Ms. Heffel. “But even if that’s not going to happen, it’s great to be able to talk to people about the advantages of leaving those assets to charity in their estates.”
In addition to soliciting would-be retirement-plan donors one-on-one, Ms. Heffel says, the association will, for the first time, publish information about pension-account gifts in forthcoming editions of the university’s alumni magazine and newsletter for alumni who are 50 years of age and older.
Says Ms. Choate: “Those accounts are ticking time bombs when it comes to taxes. Charities have to spread the word for their own good and for the good of donors who would much rather leave their I.R.A.’s to charity than to the government.”
