You already know how tax-deferred plans benefit your retirement planning, but do you know how to maximize their benefits for your favorite charities?

Like most of our clients, you probably have one or more tax-deferred retirement accounts such as a 401(k) plan, a deferred compensation arrangement, an individual retirement account (IRA), or a Keogh plan. During lifetime these accounts enjoy substantial income tax advantages. These may include one or more of a front-end income tax deduction for contributions by the employee, tax-exempt matching contributions by an employer and tax-free accumulation of dividends, interest and capital gains until assets are withdrawn from the account. While distributions out of a tax-deferred retirement account to the plan participant are customarily taxable as ordinary income, that result is usually far more than made up for by the advantages of front-end deductions and the deferral of taxes until distribution.

Our experience with the estates of many retirement account participants is that the balances remaining in those accounts at death are often significant—sometimes representing a major estate asset. Unless the marital deduction is available to further defer taxes by leaving the account balances to a surviving wife or husband, the estate and income taxes to which the accounts may be subject can substantially diminish those accounts. For example, estate taxes on the accounts can run as high as 35 percent, and income taxes to the recipient can consume 35 percent or more of the balance remaining after estate taxes. In a particularly severe case, accounts left to grandchildren may also be subject to an additional 35 percent generation-skipping transfer tax. Suffice it to say, after two or possibly all three of these taxes are exacted, the amount remaining for family or other individual beneficiaries to enjoy will have been depleted substantially.

Payments from tax-deferred accounts to charities at death are wholly free from any taxes. What might have been subject to an overall tax burden exceeding 55 percent can be worth 100 cents on the dollar to the participant's favorite charity. Put another way, you can provide substantial benefits to your favorite charities at a very low net cost to your family.

Charities can be named as a beneficiary or one of the beneficiaries of a retirement account. This is done by signing a beneficiary designation form supplied by the trustee of the retirement plan and not by your Will. For technical income tax reasons, it is better for a charity or charities to be the only beneficiaries of a particular account rather than a partial beneficiary of a larger account that also benefits individuals. Where the plan participant wants to leave only a portion of overall account assets to charity, the best way to do so can be to create a separate IRA for that portion which, at death, passes exclusively to charity.

Did you know about the limited-time opportunity to benefit your favorite charities with gifts from your IRAs during your lifetime?

In 2006, Congress enabled individuals over the age of 70 1/2 to make qualified charitable contributions from their Individual Retirement Accounts of up to $100,000 per year.

Without this provision, individuals desiring to make gifts using their IRA assets would have had to take withdrawals from their IRAs, recognizing taxable income on the withdrawals, and then give to charity from the withdrawn assets. The recognition of income would increase the taxpayer's adjusted gross income, which may limit the availability of medical expense and other miscellaneous itemized deductions that are limited to the excess over a percentage AGI. Further, the limitations on income tax charitable deductions may result in the taxpayer owing some income tax on the withdrawal even though the entire amount was directed to charity.

The qualified charitable contribution provisions, which have been extended through 2012, permit taxpayers to direct gifts to their favorite charity directly from the IRA provider. This avoids the problematic recognition of income and the income tax that might apply because of the charitable deduction limitations.

Qualified charitable contributions from IRAs are limited to $100,000 per year, and they are only available to taxpayers over the age of 70 1/2. They may be counted against the taxpayer's required minimum distribution. The class of charities that may receive the contributions is limited (private foundations are not qualified recipients of these gifts). While the gifts must be made from IRAs, taxpayers with tax-deferred 401(k)s or 403(b)s that may be rolled over into regular IRAs may execute partial rollovers of assets totaling $100,000 for the specific purpose of making a qualified contribution from the rollover IRA.

© 2011 Perkins Coie LLP