Many
people wish to benefit charities at death. The reasons for benefiting a charity
are numerous, and include: a general desire to benefit the charity; a desire to
minimize taxes; or the absence of other family relations to whom bequests may
be made. In general, leaving assets to charities at death may permit the estate
to claim a charitable tax deduction for estate taxes. This potentially reduces
the total amount of the estate available for taxation by the federal
government. However, most people are not affected by estate tax this year
because of an exemption amount of over $5 Million.
Leaving the retirement
plan to a charity, however, permits an individual to potentially claim not only
an estate tax charitable deduction, but also a reduction in the total amount of
income tax paid by retirement account beneficiaries. Because qualifying
charities do not pay income tax, a charitable beneficiary of a retirement
account could choose to liquidate and distribute the entire plan without paying
any tax. To a certain extent, this strategy is like “having your cake and
eating it too”: Not only has the employee avoided paying capital gains taxes on
the account during his or her lifetime, but also the beneficiary does not have
to pay income tax once the plan is distributed. Now that’s effective tax
planning!
Of
course, as mentioned earlier, one must have charitable intent prior to naming a
charity as beneficiary of a retirement plan. In addition, the plan designation
should be coordinated with the overall plan. For instance, does the current
revocable trust provide a large gift to charities, while the retirement plan beneficiary
designation names individuals only? In such a case, it may be appropriate to
switch the retirement plan beneficiaries with the trust beneficiaries. This
would minimize the total tax paid overall after the death of the plan
participant.
If you have more questions, contact our Silicon Valley Estate Planning attorneys.
NOTICE: While we would love your business, we cannot represent you as an attorney until we are able to determine that there are no conflicts of interest between yourself and any of our existing clients. We ask you not to send us any information, (other than as requested on the “Contact Us” page,) about any matter that may involve you until you receive a written statement from us that we will represent you.
DISCLOSURE UNDER TREASURY CIRCULAR 230: The United States federal tax advice, if any, contained in this website and associated websites may not be used or referred to in the promoting, marketing, or recommending of any entity, investment plan, or arrangement, nor is such advice intended or written to be used, and may not be used, by a taxpayer for the purpose of avoiding federal tax penalties.
