by Joel M. Blau
Physicians with large retirement accounts were thrilled when Congress waived the 15 percent surtax on withdrawals in excess of $155,000. This temporary window of opportunity for those wanting to make large withdrawals will end with the 1999 tax year. Unfortunately, the estate tax version of the "success" tax remains intact. Affected are individuals with $1 million or more in qualified retirement plans such as pensions, profit sharing plans, IRAs and Keoghs. The combined effect of estate, income and excise taxes can be devastating by depleting more than 80 percent of your planquots assets. If you are charitably inclined, you may want to consider donating some or all of your IRA.
How do you determine if the donation should come from qualified retirement assets such as an IRA or from other assets? Based on current tax law, the choice will depend on when the gift is made. When making current charitable gifts of appreciated securities, you can take advantage of an immediate tax deduction based on the securitiesquot current market value. If your cost basis in a stock or mutual fund is $10,000 and the value is $25,000, you are liable for the taxable gain at the time of sale. If, on the other hand, you donate that security to charity, you can take an immediate $25,000 deduction and avoid paying tax on the $15,000 gain.
Compare this strategy to charitable gifting using your IRA assets. Current tax law prohibits the outright charitable donation of IRA assets while you are alive. To make the contribution, you must first take a taxable IRA distribution, then make your tax-deductible donation. In the case of appreciated assets, it makes more sense to gift the stock held outside the IRA in order to avoid taxation on the securityquots growth.
Contributions at death work much differently. At death, your non-IRA assets receive a "step-up in basis" to full market value, and your heirs avoid the capital gains tax on the appreciation. However, there is no step-up in basis for IRAs. In this case, the preferred asset to be left to your heirs would be the appreciated security, while the IRA could be left to charity. When an IRA is bequeathed to charity, it escapes both estate and income taxes. The only tax imposed is the 15 percent excise tax, assuming that the IRA at death is worth $1 million or more.
Taxes are always subject to change, and the future of the "success" penalty tax is unknown. Currently, however, the decision of which assets make the best charitable donation appears to be dependent on whether the gift is made pre- or post-death. While you are alive, highly appreciated non-IRA assets appear the best choice. For a bequest in your will or via beneficiary designation, give serious thought to gifting your IRA assets.
Joel M. Blau is president of MEDIQUS Asset Advisors, Inc.