RETIREMENT ACCOUNTS – THE GIFT THAT COSTS THE LEAST
Retirement plans are less valuable in the hands of heirs than they are in the hands of charitable institutions like St. Catherine’s School.
Retirement plans designated for St. Catherine’s School save income and estate taxes. These tax savings will pay for most of the gift.
Funds withdrawn from these plans must usually pay income tax, and accounts held by large estates may owe estate tax as well. For accounts left to anyone other than a spouse, these combined taxes can easily approach 70%. No other asset is so heavily taxed.
Here is an example:
Mrs. Jefferson '48, owns at her death a 401(k) worth $600,000. She leaves the retirement plan to her children, and designates appreciated stock, also worth $600,000, to the School.
Because of her estate’s size, the retirement plan is subject to estate tax at the 40% rate.
Add the income tax, and her retirement plan could undergo taxation of up to 70%, as follows:
$600,000 Retirement Plan total balance
- $240,000 Estate tax at 40% of total balance
- $188,000 Income tax at 30% of $360,000
=$252,000 Remaining in the account for Mrs. Jefferson's children after combined taxation
Less than half of Mrs. Jefferson’s retirement plan ends up with her children, where she wanted it to go. Instead, a better result for everyone:
In lieu of leaving the 401(k) plan to her children, Mrs. Jefferson designates the retirement plan balance to the School. As a charitable contribution, the retirement plan escapes both income and estate taxation. This arrangement also benefits her children, who inherit the $600,000 stock portfolio on these favorable terms:
- free of taxation on any capital gains in the stock at their mother’s death, since the basis in the stock is “stepped up” to its fair market value at the date of her death, and
- protected from any federal estate tax by the currently applicable estate tax credit.