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Gifting Money from a Retirement Account

Gifting Money from a Retirement Account
Many people like the idea of giving some portion of their estate to charity. However, charitable gifts are often overlooked or put on the back burner during the estate planning process.

When preparing an estate plan, it’s easy to neglect charitable giving, especially if your main focus is to get the plan done most efficiently and move on to the next task on your list. However, a recent article from the Tri-Cities Area Journal of Business recommends gifting money from a retirement account as a way to incorporate  charitable giving in your estate plan that won’t be overly burdensome: “Use retirement accounts to give to charity in your estate plan.”

An estate comprises different assets, which all have different characteristics. Some assets are distributed by a will, and others by the beneficiary designation on the account. Some are subject to income taxes for heirs, and others are not taxable. This info needs to be considered when preparing an estate plan.

If you choose to give pre-tax retirement accounts, those funds are typically subject to income tax when beneficiaries withdraw money from them. A pre-tax retirement account may be more expensive for heirs, especially if they are in a high-income tax bracket. The inheritance could also push them into a higher tax bracket.

Nonprofits are not subject to income tax and are grateful to receive pre-tax retirement assets.

Your estate plan consists of a last will and testament, powers of attorney, health care directives and possibly a trust. Your estate includes different types of assets, and you’ll need to consider their value in light of their tax liabilities when creating an estate plan.

Beneficiary designations are usually used with life insurance policies and retirement accounts. They can be changed whenever you want, and you can name whoever you want to receive the accounts, except pensions governed by federal law. Those must go to your spouse and follow the rules of the pension custodian.

To understand this concept, let’s say a married couple has two children and a net worth of $1,000,000, which includes a $500,000 house, $100,000 in the bank and $400,000 in their retirement accounts. If they want 10% of their estate to go to a charity and the rest to their children, they could do the following:

  • Write the amount or percent of the donation into their will and direct their executor to ensure funds are donated from their probate estate, or
  • They can use the beneficiary designation on their retirement account to give a certain percentage to their children and charity.

The charity will receive $100,000 from the pre-tax assets, thereby preserving more nontaxable assets for their children. As assets change over time, they may need to change the percentage of the assets given through the retirement accounts. Assuming high marginal tax rates, by giving from their retirement accounts, their heirs will net a higher amount than if other assets were used to make the gift to the charity.

If your estate plan hasn’t included charitable giving, and this is an important part of your legacy, consult with one of our estate planning attorneys here at Beck, Lenox and Stolzer. They can advise you on how to structure your estate plan and beneficiary designations to work together to achieve your goals, including the option of gifting money from a retirement account. We offer a free phone consultation with one of the attorneys, and you can schedule here.

Reference: Tri-Cities Area Journal of Business (April 15, 2024) “Use retirement accounts to give to charity in your estate plan”

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