Retirement Assets
When a non-charity removes money from retirement plans and IRAs, somebody pays a federal income tax of up to 35%, then the state gets a cut. Even worse, at death these assets may be subject to substantial federal estate tax.
Retirement benefits are different from other assets that can be passed to regular people without income tax. For example, a child inheriting stock worth $300,000 from his parent (that was purchased by the parent for $100,000) won’t have to pay income tax on the $200,000 appreciation. Not so for retirement benefits. Retirement benefits are subject to both income tax and estate tax. A special income tax deduction for the estate tax helps noncharitable beneficiaries but the combined income and estate tax can still be large. Giving these assets to charity provides advantages:
· The retirement benefits going to the charity won’t be subject to the federal estate tax.
· No income goes to the estate, since it went to charity. It’s not so obvious, but this could be a big deal.
· The retirement account owner’s surviving spouse, children and others who may be beneficiaries of the estate won’t be considered to receive taxable income when the retirement benefits are paid to the charity.
· The charity won’t have to pay federal income tax on distributions from the qualified plan or IRA and generally won’t have to pay state income taxes, because it’s a charity.
Our practice frequently utilizes “split-interest” trusts to handle retirement assets. We create an interest for the survivor or survivors and another for a charity, which is often a family foundation. For the right family, this kind of trust will result in more money going to family members then would have happened if the trust were not created, and a substantial amount going to charity. For those who like charity and love their families, this is usually a good way to go.