| Charitable
Bequest May Eliminate IRA Tax Trap  Over the last twenty years, Individual Retirement
Accounts and other "qualified" retirement plans have become an increasingly
important element of many individuals’ estates.
However, while these accounts provide attractive tax benefits during working years, they
can be heavily taxed when their owner tries to leave plan assets to someone other than a
spouse.
Consider the case of Fred and Alice, a 75-year-old couple who plan to leave an IRA worth
$500,000 to their daughter after they are both deceased.
Because of the value of their estate, the IRA balance will be subject to federal estate
taxes when it passes to their daughter.
Moreover, she will be required to pay federal and state income taxes on the bequest.
Let’s assume that the applicable estate tax rate is 50% and the applicable income tax
rate is 40%. The results are daunting:
| IRA balance |
$500,000 |
| Estate tax (50%) |
(250,000) |
| After estate tax |
250,000 |
| Income taxes (40%) |
(100,000) |
| Net of estate and income taxes: |
$150,000 |
In short, 70% of the IRA will be lost to the corrosive combination of estate and income
taxes.
Fortunately, there is a way to avoid such burdensome taxation, enjoy the benefits of your
retirement plan, and control its final disposition.
If you bequeath your remaining retirement plan assets to a duly recognized charitable
organization, your estate will receive a charitable deduction that will eliminate estate
tax on those assets.
When the charity receives the bequest, no income tax will be due because the charity is
exempt from income taxation.
This means that if you leave retirement plan assets to Mines, it will receive all
that is left, and you and your spouse will retain the use of the assets for as long as you
need them.
Because retirement plans are tax-deferred, you will be making a gift with money that has
never been taxed—and never will be.
Fred and Alice, like the rest of us, may wish to direct all or part of their IRA to
charitable interests and investigate other strategies for providing for their daughter.
Because the rules governing IRA distributions are complex, it is important that you seek
competent professional counsel before you take action in order to avoid unintended
consequences.
Also, Congress has shown interest in changing the rules governing lifetime gifts made from
IRAs and other qualified plans.
Under proposed changes, a donor may be allowed to withdraw funds from an IRA without
recognizing income if the funds were used to make an outright or life-income gift.
Stay tuned.
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