Gifts from Retirement Plans

© iStockphoto.com/Kenneth Mellot

Most people know that their Individual Retirement Accounts (IRAs), Keoghs or qualified pension or profit-sharing plans are taxable when they take money from them; but people don't often know that there is another tax looming over those same retirement plans - the estate tax. This double taxation - income and estate tax - can mean that heirs could lose well over 50% (and maybe as much as 70 or 80%) of the value of those plans.

So if you're thinking of making a gift to help the animals, retirement plans often can provide a wonderful opportunity to make a gift to WSPA and help your family at the same time.

What is this double taxation about?

First of all, retirement plan assets left to heirs are taxable to them as ordinary income. But even before that, the assets are subject to estate taxes - taxes that can range up to 45% (or higher) of the assets you leave to your heirs. The combination of income tax and estate tax can be devastating.

Can anything be done about this?

There is no way to make these taxes go away completely. If your estate is subject to estate taxes (see your financial advisor for more information on this), these taxes will have to be paid. Distributions from retirement plans are always taxable.

Can I make charitable gifts of retirement assets during my lifetime?

You can do this, but it often does not make good financial sense. It;s necessary to withdraw money from your retirement plan, pay the income taxes and then give the money to WSPA. Of course the gift to WSPA would be eligible for a charitable income tax deduction, but that would probably only eliminate the tax you'd have to pay on the withdrawal. As a result, you would really be no better off financially.

Are there any situations where lifetime gifts might make sense?

There are. If you are required to take larger annual distributions than you need and accordingly have to pay more tax than you like, you could make annual gifts to WSPA, take the charitable income tax deduction and lessen the effect of taking the larger distribution.

Would it be better to make charitable gifts of retirement assets in my estate plan?
Yes. There are 2 ways:

1) by naming WSPA as a beneficiary of your retirement plan; and

2) by making a charitable remainder trust the beneficiary of your retirement plan.

How can I name WSPA as a beneficiary of my retirement plan?

You can name WSPA as a direct or contingent beneficiary of your retirement plan to receive either a percentage or the entire amount of your retirement plan.

Why is this advantageous?

Retirement benefits pass to a charity free of income or estate tax. An individual can achieve a significant tax savings by designating a charity as beneficiary of tax-deferred retirement benefits when compared to paying a charitable gift of the same amount out of other assets and leaving the retirement benefits to a non-charitable beneficiary.

What are the advantages of naming a charitable remainder trust (CRT) as a beneficiary?

If you make a CRT the beneficiary of your retirement plan, these assets will qualify for a partial charitable estate tax deduction. The income distributed to your heirs from the CRT will not be taxable until it is distributed, so often the principal will grow with prudent investment management and result in even larger income to your heirs. This way they can get much more of the benefit of the retirement plan - and you make a generous gift to help WSPA.

How do I make a charitable remainder trust the beneficiary?

You have to create the trust first. You can then name the CRT as either the primary beneficiary if you have no surviving spouse or the contingent beneficiary if you have a surviving spouse.

For more information, please contact:

World Society for the Protection of Animals
Lincoln Plaza
89 South Street, Ste. 201
Boston, MA 02111

E-mail: wspa@wspausa.org
Phone: 1-800-883-9772
Fax: 617-737-4404

WSPA does not seek to replace the advice of your own tax counsel. Please consult your own advisors before taking action. Figures are for illustration purposes only and are subject to change.

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