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UT Austin Gift Planner — Nov. 17, 2010

Giving News

UT Austin Gift Planner — Nov. 17, 2010

Nov. 17, 2010

The Gift Planning team at The University of Texas at Austin brings you this special edition of the Gift Planner, an online resource for professional advisors in the estate and financial planning industries. The Gift Planner provides practical information on gift planning issues, reports new developments in charitable giving techniques, connects you with leading professionals, and informs you about key events and resources at UT Austin.

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Do you have clients who are still considering converting their traditional IRA to a Roth IRA in 2010?

The September issue of Trusts and Estates magazine contains an informative article — “Are IRAs and Charities the Perfect Match?” — that demonstrates how conversion from a traditional IRA to a Roth IRA can, in the long run, maximize the amount of an estate that a person’s children will ultimately receive.

The article takes a fictional client, age 65, with $2 million in a traditional Roth IRA and other assets valued at $11 million. The client wants to make a charitable gift while maximizing the amount she can leave through her estate to her 30-year-old daughter. The questions at issue concern whether the client should convert her traditional IRA to a Roth IRA; whether the charitable gift should come from IRA or non-IRA assets; and finally, whether the gift should come during the client’s lifetime or after her death.

The article considers nine different strategies, varying the circumstances to consider all the options mentioned above. To maintain consistency in each case the charity receives the same amount at the end of the time period.

Among all the scenarios the ones in which the client converts to a Roth IRA provide the greatest inheritance over the long term for the client’s daughter. In fact the conversion to a Roth IRA leaves the daughter with more than twice the amount she would receive in any of the scenarios in which the client held onto a traditional IRA. In some cases the amount the daughter would receive could be as much as three times greater than if the mother had retained a traditional IRA.

In the first scenario, which established the baseline for all other comparisons, the mother withdraws the entire $2 million from the IRA, deposits the funds, and then makes an outright gift to charity in the same amount. This case produces the lowest inheritance to the daughter of all the strategies considered, just more than $4 million.

Surprisingly the scenarios where the client either rolls over the IRA to charity or takes the minimum required distributions during her lifetime and then leaves the remainder of the IRA to either her daughter or the charity at her death produce substantially the same inheritance to the daughter as the first scenario.

The best strategy of all occurs when the client converts her traditional IRA to a Roth IRA and recognizes half the income in 2011 and half in 2012. She uses a combination of appreciated securities and cash to make the entire charitable gift in 2011. * Then the client makes her daughter the beneficiary of the Roth IRA. This approach provides the daughter with an inheritance that is 334 percent the amount the daughter received under the first scenario, more than $13.5 million.

* The combination is important because in this case had the donor made the charitable gift using only appreciated securities the 30 percent of AGI limitation on charitable deductions would mean that the client would be unable to use her entire charitable deduction, even with the five-year carry-forward period.

You can view the entire article here.  The link has been provided with the permission of Trusts and Estates magazine.

To comment on this article or if you have any questions please contact a member of the Gift Planning team at 512-475-9632 or at giftplan@www.utexas.edu.

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Mark your calendars now for Professional Advisors Day

The Gift Planning Team at The University of Texas at Austin will host the fourth annual Professional Advisors Day on Friday, May 13, 2011, in the new Student Activity Center on the main campus of UT Austin. This free seminar for professional legal and financial advisors will include two hours of continuing-education credit, and speakers will be announced in early 2011.

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