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You are considering a gift made after death > You hold a 401(k), IRA, or other retirement plan > You want to ensure the most efficient distribution of the assets in your estate.
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To educate youth, to feed the hungry, or to
support any other cause that is close to your
heart, consider all the ways you can give
back blessings by leaving a legacy. |
As with many donors, your
largest asset may be your retirement plan
– your 401(k), 403(b), IRA,
Keough, or other such accounts. When you plan your
estate, you may automatically designate a child
or other relative as the successor beneficiary of
the account after your death, then use cash or securities
to make a charitable gift to your favorite charity.
But there’s a tax trap in such an arrangement: the IRS considers the balance left in your retirement account to be untaxed income, and it will assess any heir, except your spouse, income tax on the value of the account they receive. The income tax is in addition to the estate tax on the retirement account balance.
The result of this double taxation? For estates fully subject to the estate tax, up to 75 percent of the value of the retirement plan can be consumed in taxes before your child, relative or friend receives it:
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Here’s how it could work. Say the balance remaining in your IRA at your death is $500,000, that your estate was subject to 50% federal estate tax, and that your heir is in the 38.6% income tax bracket:
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IRA
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$500,000
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Less 50% estate tax
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(250,000)
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Transfer to heir
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250,000
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Less 38.6% income tax
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(96,500)
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Net to heir
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153,500
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Total tax %
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69%
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There is a sensible charitable alternative: Name your favorite charity as the beneficiary of your retirement plan, and use your other assets, not subject to income tax, to make gifts to your heirs. Since they're a non-profit organization, they won’t pay income tax on the distribution (nor will the gift be subject to estate tax). Meanwhile, your heirs will receive their share of your estate without the burden of extra taxes.
Distributions may be made to charity outright or may fund a charitable remainder trust paying income to your heirs.
When you consider a gift from your
retirement plan, keep the following points in
mind:
- Direct the gift to charity via
your plan’s beneficiary designation form
– do not include the account in your taxable
estate, then bequeath it.
- Do not use the balance in your
retirement account to satisfy a specific dollar-amount
bequest already in your will. Your estate will
be treated as having received taxable income
in the amount of the bequest paid by the retirement
plan assets.
- If you want to make your charity
the partial beneficiary of your plan and direct
the balance to your heirs, it may make sense
to do so through separate accounts for the charity
and the individual beneficiaries.
- The tax benefits of a lifetime
gift from your retirement account are not so
favorable as those for a transfer at death.
The tax law may change (this website will keep
you posted), but at present the IRS taxes withdrawals
you make from your retirement account or IRA
to fund charitable gifts, and it does not allow
tax-free rollovers from your plan into a life-income
gift.
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