Gift Planning

Retirement Plan Choices

Like many Americans, you are probably aware that the accumulation of assets in your retirement plan can be the basis for a financially secure future. To ensure that your retirement assets are put to good use after your lifetime, consider the benefits of using them for a charitable gift.

Retirement accounts are exposed to income taxes and, at times, estate taxes that together can rise to nearly 60 percent on large, taxable estates. Yet these taxes can be eliminated or reduced through a carefully planned charitable gift. That's because when you leave your retirement assets to charity at your death, 100 percent of the funds go to charity—no taxes are taken out.

How Retirement Accounts Are Taxed
Qualified retirement plans are those that receive favorable income tax treatment during your lifetime. No income tax is owed on the funds when contributed into the plan, and no income tax is owed on the earnings and appreciation while still in the plan. You pay taxes on the funds only when you receive distributions from the plan.

Generally, at your death, the balance of qualified retirement plans is fully includable in your estate for estate tax purposes. (In 2011 and 2012, your estate must be worth more than $5 million for estate taxes to apply.) Regardless of whether your estate is subject to estate tax, because the funds in these plans usually represent deferred compensation that has not been subject to income tax, leaving the accounts to heirs means they'll have to pay income tax on what they receive. Your retirement dollars can be seriously depleted by one or both taxes.

Support Our Future With Your Retirement Account
The simplest way to leave the balance of a retirement account to us after your lifetime is to list us as the beneficiary on the beneficiary form provided by your plan administrator. Never make a beneficiary change, however, before discussing your desires with your professional advisor.

If you are married, your surviving spouse is generally entitled by law to receive the entire amount in the following qualified plans: money purchase pension, profit-sharing plan, 401(k) plan, stock bonus plan, ESOP, or any defined benefit or annuity plan (though not an IRA). Therefore, there are three options to consider when leaving your retirement plans to us:

1. In order for the assets to be given to us or any other charity, your spouse must sign a spousal waiver of the benefits. Designating us as beneficiary on your employer's forms without the spouse's written waiver is not enough to ensure your gift to us.

2. If you prefer to make your spouse the primary beneficiary of the retirement account, you can name us as the contingent beneficiary, allowing us to receive the funds only if your spouse doesn't survive you.

3. If you want your children to benefit from your retirement account, too, you might designate a specific amount to be paid to us before the rest is divided among your children.

Provide Life Income for a Beneficiary
Another tax-smart option is to use your retirement assets at death to fund a deferred giving plan, such as a charitable remainder trust. The trust pays income to a beneficiary you select, typically for the person's lifetime.

After his or her death, the remaining balance in the trust will support our work.

There are two main types of charitable remainder trusts to choose from:

A charitable remainder annuity trust pays the beneficiary a fixed amount each year. These payments never change and additional assets cannot be added to the trust.
A charitable remainder unitrust pays the beneficiary a variable amount annually. The payments from a unitrust change each year based on the value of the assets in the trust.

The payout from either type of trust must be at least 5 percent of the trust assets.

Seek Professional Guidance
Using funds from your retirement plan account may be the most tax-effective means of making a charitable gift. Because the laws vary depending on when and how you make the gift, and to receive the most tax benefits from your philanthropy, please seek guidance from an attorney and other professionals who are thoroughly versed in this area of tax law.

We are also available to answer questions you may have about how your gift can be put to good use. Simply contact us.

EXAMPLE: Funding a Life Income Gift With a Profit-Sharing Plan

The problem: After participating in her company's profit-sharing plan for many years, Anne estimates that when she dies, the account balance could be at least $200,000. If she were to name her daughter, Sandy, as the beneficiary, the entire amount would become ordinary, taxable income to Sandy. Federal income taxes alone could deplete 35 percent of the $200,000.

In addition, federal estate taxes would be owed if Anne's total assets equaled more than $5 million, depleting even more in taxes. When both federal taxes are combined, nearly 60 percent of the account could be consumed by taxes—even more if state taxes are owed.

The solution: Instead, Anne creates a charitable remainder unitrust and names it as the beneficiary of her profit-sharing plan. She arranges for the unitrust to pay 7 percent of the value of the assets to Sandy each year for her life. The net result is a significant income tax deferral, and the entire $200,000 can be invested by the trustee to help make the 7 percent payment. The partial estate tax charitable deduction for the present value of the charitable remainder interest will reduce Anne's future estate tax bill.

The information on this website is not intended as legal or tax advice. For legal or tax advice, please consult an attorney. Figures cited in examples are for hypothetical purposes only and are subject to change. References to estate and income taxes apply to federal taxes only. State income/estate taxes or state law may impact your results.