Basically, an Individual Retirement Arrangement (IRA) is a vehicle that can provide tax deferred growth of your investments and is only taxable as income when you take distributions.

IRAs are unique vehicles. During the IRA account opening process, you designate a beneficiary. Your beneficiary can be your estate, but it is usually best to name a person or charity. Usually regardless of your written instructions in your will, your IRA will pass to the person or entity named on your IRA beneficiary form.

Now with this basic understanding of IRAs, you will be able to grasp the charitable options more easily. IRAs are terrific vehicles to give to charity. You have two possible options to make this happen.

The first way is to name the charity as your IRA beneficiary so at your untimely passing; the charity receives your IRA with no tax due to you, your spouse, your estate or your children.

The second way is by giving while you are alive. The IRS has recently allowed a person to give a maximum of $100,000 directly to a charity from your IRA. I stress directly because you are not suppose to take possession of the money at all. In order to complete this giving, you must be 70 ½ or older and I will stress again the transfer must come directly from your IRA. This benefit is available for 2008 and 2009 tax years only.

The benefits of doing this are numerous. If done properly you may not owe taxes, the charity will not owe taxes and your gift will be put to work in the community today. This strategy also has the added possible benefit of maximizing assets given to your family by possibly minimizing taxes to your estate or your beneficiaries.

For example, assume for a moment you have a $500,000 IRA. If you give this asset to charity at death, no taxes are ever due and the charity receives the full value. On the other hand, if you give your $500,000 IRA to your son or daughter, they will most likely have to pay taxes on all distributions. As a result, they probably will never receive the full value of the IRA. It would be best to give your son or daughter a different asset with little or no capital gains or income taxes due, like cash or stock with a higher cost basis. Make sure you discuss this strategy with your tax advisor.

With proper planning your heirs may receive a better, less taxable asset to inherit, and your favorite charity will receive the full value of your IRA! This is a smart play, but to make it happen you need to plan, execute and most importantly, communicate with your family the unwavering direction in which you would like to use your IRA to leave your legacy.

The Winona Community Foundation (WCF) has been fortunate to receive assets in this manner from Dr. John and Margaret Cross. With their children’s consent we have made this information public because they hope others will do the same. The Cross’ made a gift of their IRA to a Donor Advised Giving Fund by designating WCF as the beneficiary of John’s IRA account before he passed away. They wanted Winona charities to benefit from the gift, and their estate saved money in taxes. Their Fund acts as a charitable holding tank and receives future giving recommendations from the Cross’ children.

So how can you do the same thing? For IRA assets, simply updating your will is not the best method. First, you need to request a new IRA beneficiary form from the company holding your IRA. Then, you could name your spouse as the primary beneficiary and your favorite charity as the second beneficiary. Next, if/when you pass away, your IRA may pass seamlessly to the charity of your choosing to continue your steadfast desire to help the Winona community. If you are interested in this strategy, consult your financial or tax advisor as well as the charity for resources to assist you with this exciting giving tool.

Michael Arnold CFP® is located in Minneapolis. He can be reached at www.retirementplanningnavigators.com or 612 216 2075. Michael is a Financial Advisor with LPL Financial and offers securities through LPL Financial, Member FINRA/SPIC, as well as serves as a community advisor on the Finance and Audit Committees for the Winona Community Foundation