Tax-favored retirement accounts such as IRAs, 401(k)s, 403(b)s, pension plans, and profit-sharing plans can be a nice nest egg for your senior years.

Often, when people look at their estate plans, they find that their retirement account comprises the largest share of their total estate. Naturally, when deciding which assets to leave to your children and which to leave to charities, it appears that the asset with the highest value, the IRA, should go to your children.

However, these retirement vehicles are like a double-edged sword when you’re making your estate plans. Because of the way these accounts are structured, the growth of these assets becomes income to your estate. This means that unlike many other assets in your estate, your retirement plan assets can be subject to double taxation — income tax and estate tax — if given to someone other than a spouse or charity.

“While many retirees name their children as second beneficiaries of IRAs, there may be more tax-wise approaches to this planning, particularly if you wish to leave some gifts to your favorite charities, such as Buena Vista University,” says Ken Converse, vice president for institutional advancement at BVU. To illustrate this point, here are a couple of options.

OPTION 1
You may wish to make gifts to your heirs and to charitable organizations at death. Assuming that you have both retirement accounts and other assets, it would be tax wise to use your retirement account to make testamentary gifts to the charities, and use other assets for bequests to your children or other heirs. Taking this approach avoids the double taxation on the gift to your heirs.

If you do not want to leave all of the assets in your retirement account to charities, you could specify only a portion of those assets for charities, with the balance going to your heirs. By making your charitable distributions out of your retirement funds, you can greatly reduce the income tax liability resulting from your death.

As you might expect, leaving the retirement account to your spouse only postpones the inevitable, with the possibility of even more of your retirement being taxed away because of the impact of double taxation.

OPTION 2
Another approach to tax-wise planning is for a married couple who both own IRAs to name a charitable remainder unitrust (CRUT) as beneficiary of the assets at death, with the surviving spouse being the income beneficiary. The income payout percentage can be structured in a way that would mirror the current income being received from the IRA’s annual distributions.

In this scenario, while both spouses are living nothing changes. Upon the death of the first spouse, the surviving spouse would continue receiving life income from the CRUT, which is funded by the deceased spouse’s IRA. At the death of the second spouse, the assets of the CRUT would be distributed to pre-designated charities.

FIND OUT MORE
“Bottomline, this means that a testamentary charitable gift of a retirement account saves more taxes than any other gifts to charity at death,” says Converse. In effect, more of your gifts to charitable organizations would be paid from what would otherwise be tax dollars. By using other assets in your estate for bequests to your children or others, typically only the estate tax may apply.

FURTHER TAX RELIEF MAY BE ON THE HORIZON The federally-proposed Charity Aid, Recovery and Empowerment legislation — known as the CARE Act — contains a provision that would permit people 701/2 or older to shift money (under the IRS minimum distributions rules) from their individual retirement accounts directly to a charity or a CRUT without paying federal income tax on the withdrawals. If enacted, this would be a significant gift vehicle for donors who wish to maximize the impact of their gifts to charitable organizations. As of press time, the legislation had not yet passed the Congress. BVU continues to be an advocate for the passage of this legislation and will alert our contituents as IRA gifting rules change.

However, tax savings are usually not the only consideration in estate planning. Thus, selecting a plan that gives the proper balance to the financial security of you and your spouse, bequests to your children, and gifts to charities is important.

Typically, such changes in your estate plan can be implemented by working with your qualified plan administrator to complete the appropriate paperwork, and by consulting with your legal and financial counsel. In addition to checking with your personal tax and legal advisor, you can also contact the BVU Office of Institutional Advancement for additional free information to help you select the best option for your particular situation.

* This article is not intended as legal or financial advice; individual results may vary, depending on your specific situation. Please consult your legal, tax, and financial advisors on the applicability of any item to your situation.

BVU Home | Contents | Next