Retirement funds as charitable gifts

One benefit of a qualified retirement plan is that the funds grow tax-free, meaning that there is no tax paid on these funds until they are withdrawn. Such an arrangement is advantageous, especially if you are in a lower income tax bracket after retirement when the funds will be used.

However, don't discount the tax impact when you withdraw the funds. If a lump sum is withdrawn, the income tax assessment can be significant. If there is a balance in the plan upon your death, income tax is due on the remaining amount. An exception exists if a spouse receives the retirement assets, but such a tax would then be due on whatever remains in the account at the spouse's death. Depending on the size of your estate, there could also be estate tax consequences.

Using qualified retirement plan assets is ideal for someone planning to make a charitable gift through a bequest. When a charity is the designated beneficiary (or the contingent beneficiary after the death of a spouse), the assets going to the charity avoid taxes. The beneficiary designation can be for the entire amount or for a percentage of the retirement plan assets. Note: it is important that the charity be listed as a beneficiary on the retirement plan–it is not enough to merely indicate that you wish the bequest to be paid out of retirement fund assets.

Another strategy is to use a charitable remainder trust. In this scenario, the qualified retirement plan assets are placed into a charitable remainder trust for the benefit of a spouse and/or children. The charity receives the assets after the death of the last beneficiary. There can be estate tax benefits by using this method. Where this alternative is used in providing for children, payments are made to the children over a period of time. Were they to receive a lump sum, there would be substantial tax consequences.

If you are interested in knowing how you can use your qualified retirement plan assets to make a charitable gift, while avoiding possible tax burdens, please contact our office for more details. We can provide you with personalized planning tools to help you determine which strategies can work best for you. You will also want to discuss such arrangements with your own financial advisors.