Gifts of Retirement Plan Assets

Many Nebraskans have taken advantage of generous tax incentives provided by tax law to save for their retirement years. Known as “qualified” retirement plans, these plans, Individual Retirement Accounts (IRAs), 401(k), Keogh and others, feature income tax benefits when contributions are made to the plan. Plus, the money in the plan accumulates tax-free until it is withdrawn for retirement.

Double Taxation

If you choose up-front to not pay taxes by saving for retirement in a qualified plan, your family will be required to pay the taxes later and quite likely in significant ways.  When your qualified plan terminates, most likely at the end of your life or that of your spouse, the plan can potentially be subject to double taxation: Estate Tax and Income Tax. Your retirement plan could be taxed up to 68% if you don’t plan properly.

Examples:

• A $100,000 retirement plan in a $1,000,000 estate (below threshold for estate taxes) creates $38,250 in income taxes - leaving $61,750 for the family – a 38% shrinkage.
• A $1,000,000 retirement plan in a $7,000,000 estate (above the threshold for estate taxes, may change in the future) creates $625,450 in income and estate taxes netting $374,550 for the family.

Given this potential “tax bite” how can you minimize or avoid this heavy taxation?  Simply leave your hometown all or a portion of your IRA or other qualified plan.  The following are some ways to use your qualified plan to benefit your hometown and favorite charities, while minimizing tax consequences.

Beneficiary Change

Simply change the beneficiary designation on your account to the Nebraska Community Foundation for the benefit of your hometown or other favorite charities for all or a portion of the account balance.  Favorable new IRS rules have made this option more attractive without increasing your required minimum annual payments at retirement.

Contingent Beneficiary

Naming the Nebraska Community Foundation as a contingent or secondary beneficiary for the benefit of your hometown or other favorite charities gives your heirs the option to decline their right to receive your account assets should they decide not to pay the potentially heavy taxation on the account assets.

Income for Family

Your retirement account’s value may be preserved and income provided to your family with the use of Charitable Remainder Trust. The use of this trust could greatly reduce your federal estate taxes. Additionally, no income taxes would be payable on your retirement account assets.

Asset Replacement

In some situations, it may benefit your family to name the Nebraska Community Foundation as the beneficiary of your retirement plan. A newly purchased life insurance policy would replace the value of your retirement plan that would have gone to your family, without the tax consequences.