After Lifetime Gifts

Retirement Plan Gifts

Distributions from retirement plans are taxed more heavily than other types of assets when a person passes away. While many of your assets may pass to your heirs with little or no taxes (depending on the size of your estate), your heirs will have to pay full ordinary income taxes when the money is distributed from your retirement plan (including a 401(k) plan, IRA, defined benefit or annuity plan, stock bonus plan, etc.) If your estate is sufficiently large such that your heirs will also owe estate taxes, the amount they will receive from a retirement plan will be a very small percentage of the total, after they have paid the taxes on the retirement plan distribution.

As a result, many people prefer to make donations from their remaining retirement plan funds. There are a number of ways to accomplish this.

In many cases the most effective way is simply to contact your retirement plan administrator or the brokerage firm where your IRA or other tax-deferred account is located and designate a charity as a beneficiary to your account

With most types of retirement plans, if you have a spouse the law requires that your spouse be the primary beneficiary unless he or she signs a waiver of that right.

You may also name your spouse as the primary beneficiary and a charity as the secondary beneficiary.

If you want to designate a charity as a beneficiary to your retirement plan, you will want to have a clear understanding of the retirement plan's provisions and the full support of your spouse. Your plan administrator and attorney will be able to help you with these matters.

It is also possible to provide a life income to your children from a retirement plan and then have the remaining money go to a charity. In this case you could name a charitable remainder trust as the beneficiary of your retirement plan. Your children would then receive either a fixed amount of money each year or a percentage of the trust assets each year for life, after which the remaining money would be donated to charity.

An example can illustrate the power of making gifts through a retirement plan. In this example a couple has an estate consisting of a stock portfolio worth $300,000 and a retirement plan worth $100,000. No estate taxes will be owed in this estate. They have one daughter, and they want $300,000 to go to her and $100,000 to go to charity. If their daughter was named as the beneficiary of the $100,000 retirement plan and as the heir to $200,000 of the stock portfolio, she would have to pay ordinary income tax on the $100,000 from the retirement plan. If she had a combined tax rate of 36% she would end up paying $36,000 of her inheritance in taxes. Had they instead listed a charity as the beneficiary of the retirement plan and the daughter as the sole heir to the stock portfolio, the daughter would receive the full $300,000, and the charity would receive the full $100,000 from the retirement plan.

Please note that before changing the beneficiary designation on a retirement plan, you should always consult with professional advisors to get a more detailed understanding of the tax consequences involved.

Please note: The information on this site is not intended as legal, tax or investment advice. For such advice, please consult a professional advisor of your choice.

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