Having an IRA has long been touted as a smart retirement strategy. But while IRAs provide tax benefits during their owners’ lifetimes, they can become a tax liability when they are passed on as an inheritance. The solution? Use the funds to make a charitable gift.
That’s what Mark Krosse ’72 is doing for Princeton. “Most people realize that with traditional IRAs you have to be careful,” said Krosse. “They are sometimes referred to as ‘tax bombs.’ Any dollar that comes out—whether to you or to a beneficiary—will be taxed at ordinary income rates.”
Income from other assets like cash or securities is generally taxed at lower rates, leaving your heirs with more of the money you intend for them. “If you make a bequest to a charitable institution like Princeton using a traditional IRA, the dollars that originally went in tax free, go out tax free—they are never taxed,” he said.
Krosse, who retired from IBM in 2006 and moved back to his native Ohio from Connecticut, discovered another advantage to using his IRA as a philanthropic tool when he and his wife, Lisa, spoke with their attorney. “From an estate planning and administrative view, designating IRA funds as a bequest to a charity can be much simpler and easier to manage than making similar provisions through a will or trust,” Krosse said. “All you have to do is mail in a new beneficiary form to your IRA administrator. Changes and adjustments don’t require amendments, codicils, witness signatures, or document retention considerations as do wills or trusts.”
“If you make a bequest to a charitable institution like Princeton using a traditional IRA, the dollars that originally went in tax free, go out tax free—they are never taxed.”
—Mark Krosse ’72
Krosse took a further step: He coupled his IRA to a Princeton charitable remainder trust (CRT). Should he predecease Lisa, the funds still in his IRA will go into the CRT, and through that trust, benefit her. At the end of the trust, the funds go to Princeton.
“The questions we asked ourselves when we looked at our estate plan were: How do you manage uncertainty? How do you provide for a spouse?” Krosse explained. “My wife is a joint income beneficiary of the CRT, so I am able to protect her lifetime income at the same time I am securing additional funding for Princeton.”
Lisa Krosse also has an IRA linked to a CRT with Princeton. The Krosses’ long-term plan is to endow two scholarships, one at Princeton and one at Lisa Krosse’s alma mater, The Ohio State University. Designating their IRAs for charity was the first step toward this goal.