Part 52

Thomas M. Boles, 33°, Grand Cross

Under certain circumstances, retirement assets provide an excellent way to fund philanthropic gifts.

Hi, again, and Happy New Year! We can start off the new year in a very beneficial way by following up on last month’s financial column promising a better alternative to the "Hidden Tax Hit Waiting To Happen." Because most retirement plan assets are taxed twice at death (they are subject to both an estate and an income tax) many people think of them as a way to support charitable organizations in their estate plans. Under current law, retirement plan assets are not the best assets to use for lifetime charitable giving. This is because, except for those in a Roth IRA, their distributions are taxed at ordinary income tax rates. In addition, in most cases, if they are transferred from the retirement plan before age 59½, they are subject to an additional 10% excise tax.

Yet, to the degree they are not good assets to use as a lifetime gift, retirement assets are excellent in funding gifts at death. In fact, of all a person’s estate assets, retirement plan assets are the most costly to transfer to individuals, such as children, at death, yet the least costly to transfer to charity. Because of the double taxation, heirs other than charitable organizations often receive only half, or less, of the asset’s value.

Here’s an example. Let’s say Fred has a $2 million estate and leaves $1 million of it in retirement assets to his children. Because of the double taxation, it may end up benefiting them by only around $400,000, or 40% of the assets’ value. But if he leaves $1 million in other assets, such as stock, the children will receive closer to 57%, or $568,000 of the assets.

In contrast, a charitable organization, because it is tax exempt, will receive the entire amount. It’s better to leave to heirs other assets such as stocks or land—assets that, although they are included in a person’s estate for state tax consideration, are not subject to an additional income tax at death. Remember, when a retirement plan asset is properly designated for charity, both taxes are eliminated. The easiest way to ensure that a charitable organization will receive retirement plan assets at death is to make the charitable organization a beneficiary of the retirement plan. However, before you change the beneficiary designation, be sure to consult with counsel knowledgeable about retirement plans. The advice I pass along to you in this column should always be reviewed with your accountant and/or attorney. That way, you and I can sleep at night. It’s been nice talking to you again. May God bless!

Please Note: This information is distributed with the understanding that the author is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expertise is required, the services of a competent professional should be sought. From: A Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers.
Thomas M. Boles
has worked extensively in fundraising for children’s programs throughout our Fraternity. For more information see coupon above, or call Tom at 562–691–4227 (Fax 562–691–5327) or the Scottish Rite Foundation, S.J., USA, at 202–232–3579, ext. 122.