The Value of a Golden Tithe
In conversations with many churches, I have discovered that very few church leaders talk to their members about bequests or gifting a “golden tithe” — the strategy of leaving 10% or more of your estate to the church as a final act of stewardship. Worth noting: colleges and universities receive millions of dollars through bequests. As I investigated why this happens, the answer was a simple, forehead-smacking realization — because they ask! In my experience, alma maters don’t just ask — they pester you with relentless mailings and emails about how much good your gift will do. I suspect many of you also receive plenty of “solicitations” from your alma mater.
Having said that, is the goal of this article an ask? I suppose that just by bringing it up, it could be considered one. Instead, I prefer to see it as some basic teaching and clarifying that might inspire you to consider including your church as one of your final beneficiaries. Importantly, under current tax law, not all assets are equal in terms of beneficiary designations. This is especially true of traditional retirement accounts such as an IRA, 401(k), TSP, 403(b), etc. When those accounts are left to individuals other than a spouse, the recipient has 10 years to withdraw the funds, which are then taxed as ordinary income at the recipient’s tax rate. (Placing your accounts in a trust, as some people do, does not negate the tax obligation.)
Let’s consider an example. Naomi was an 80-year-old widow who lived in Northern Virginia. She had two children, Ruth and Rahab. Both are highly successful and in the 35% tax bracket. Naomi’s estate consists of her two-story, large home purchased 30 years ago for $280,000. The home is now worth approximately $1 million. Additionally, she inherited her husband’s 401(k), which, combined with her own, amounts to $800,000. She also has $200,000 in her brokerage account, for a total estate value of $2 million. She and her husband met when she was in college at Boaz University. They loved their alma mater and were committed to supporting it. She was also very devoted to her church. Therefore, she decided to leave 30% to each of her children and split the remaining 40% between her church and Boaz University.
If she merely entered that split in her will, then all the accounts would be divided evenly so each daughter inherits $300,000 from the house sale, $60,000 from her brokerage account, and $240K from the 401(k), for a total of $600,000. Boaz University and her church are delighted because they will receive a full $400,000 mix of the retirement account, the house sale and the brokerage account. Ruth and Rahab aren’t so lucky. Of the $240,000 they each inherit from the 401(k), they will each have to pay approximately $84,000 in taxes as they meet the 10-year mandatory withdrawal rule (at the current value). That means a total estate tax bill of $168,000 for the daughters.
If Naomi had planned a little differently, she could have split the 401(k) entirely between Boaz University and the church so these two entities would be thrilled because they each would still receive the full $400,000, with no taxes due. The two daughters would then split the brokerage money and the house sale funds. It is worth noting that in Virginia, it’s possible to designate a beneficiary for a house. In our example, Naomi’s two daughters were made beneficiaries of the house which reduced probate costs to little or nothing. That way, Ruth and Rahab each receive a full $600,000 and pay zero dollars in taxes. By switching who gets what, the estate saves $168,000 in taxes between the two surviving children.
What’s the lesson? Traditional retirement accounts are great ways to leave money to the church. A “golden tithe” can prevent your children, grandchildren or trust fund from having to pay taxes on those monies. Plus, changing beneficiaries is easily facilitated. The church can be named for a specific dollar amount or a percentage. Either way, you can set it and forget it. My experience has been that families are often delighted to tell the church their deceased parent left a generous gift to the church.
John Wesley encouraged Christians to “gain all you can, save all you can, and give all you can.” For some people, one of the most meaningful and generous gifts they ever give is the final one they leave behind. Thoughtful planning can bless both your family and the ministries you care about most. It is one more way our faith continues to bear fruit even after our lives on this earth.
If this topic raises questions for you, consider discussing it with your family or financial advisor. A little planning can go a long way in caring for both your loved ones and the ministries you support.
By the Rev. Brad Duty, Financial Services Advisor
Photo: David Baileys/iStock
