Gifts of Retirement-Plan Benefits

You may consider using retirement-plan benefits to make a significant gift that will support . And because of the estate- and income-tax treatment of retirement-plan benefits, the cost of your gift to your estate and heirs is often relatively small.

Retirement-plan benefits include assets held in individual retirement accounts (IRAs) and assets held in accounts under 401(k) plans, profit-sharing plans, Keogh plans, and 403(b) plans.

Income taxes on retirement-plan benefits are deferred but not avoided. That means that, as these assets are withdrawn during retirement by the account owner or the account owner's spouse, they are subject to income tax.

In addition, retirement-plan benefits left to children, grandchildren, and other beneficiaries at the death of the account owner are subject to both income tax and estate tax. This combination of income taxes and estate taxes can result in a tax hit equal to 60 percent or more of the retirement-plan benefits.

For example, Bill Woods accumulates $1 million in retirement-plan assets. Upon his death at the age of 73, he leaves his assets to his two children. Because of the tax bite, however, the amount Bill's children receive, after taxes, could be less than $360,000.

By contrast, Bill could have left the $1 million to , and the entire amount would have been available to create a scholarship or to fund another of his favorite programs.

Planning pointer: Retirement-plan benefits can also be used to fund a qualified charitable remainder trust for the benefit of a spouse. If the surviving spouse is the designated beneficiary of the trust payments for his or her life, then the entire value of the trust, regardless of its size, will be deductible for estate-tax purposes. Because a qualified charitable remainder trust is a tax-exempt entity, it does not have to pay any income tax on the receipt of the retirement-plan benefits. Thus, the full value of the retirement-plan benefits will be available to provide payments to the surviving spouse.

Please note: Because the federal estate tax has been repealed for 2010, there is no current estate tax in 2010 for the gifts described on this page. However, the consensus opinion among professionals is that Congress will enact an estate-tax law that may be retroactive to January 1, 2010. It is very important that you seek the advice of your estate-planning attorney to determine what changes, if any, need to be made to your existing estate plans, and then again if Congress reinstates the estate tax sometime later this year.
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