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You're considering a gift made after death > You hold a 401(k), IRA, or other retirement plan > You want to ensure the most efficient distribution of the assets in your estate
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Your largest asset may be your retirement
plan – your 401(k), 403(b), IRA, Keough, or other such
accounts. When you plan your estate, it may seem natural to automatically
designate a child or other relative as the successor beneficiary
of the account after your death, then use other assets to make a
charitable gift through the Foundation.
But there's a tax trap in such an arrangement: the IRS considers the balance left in your retirement account to be untaxed income. The income tax is in addition to estate tax on the retirement account balance.
The result of this double taxation? For estates fully subject to the estate tax, up to 75 percent of the value of the retirement plan can be consumed in taxes before your child, relative or friend receives it:
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Example:
Here's how it could work. Suppose the balance
remaining in your IRA at your death is $500,000, that your
estate is subject to 50% federal estate tax, and that your
heir is in the 38% income tax bracket:
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IRA
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$500,000
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Less 50% estate tax
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(250,000)
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Transfer to heir
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250,000
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Less 38% income tax
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(95,000)
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Net to heir
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155,000
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Total tax %
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69%
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There is a sensible charitable alternative:
name the Foundation* as the beneficiary of your retirement plan,
and use your other assets, not subject to income tax, to make gifts
to your heirs. Since we are a non-profit organization, we won't
pay income tax on the distribution (nor will the gift be subject
to estate tax); meanwhile your heirs will receive other assets of
your estate without the burden of extra taxes.
*Distributions may be made to the Foundation
to fund an endowment fund or to fund a charitable remainder trust
or gift annuity that pays income to your heirs.
When you consider a gift from your retirement plan, keep the following points in mind:
- Direct the gift to the Kentucky Baptist Foundation via your
plan's beneficiary designation form – rather than including
the account in your taxable estate, then bequeathing it to us.
- Don't use the balance in your retirement account to satisfy a specific dollar-amount bequest already in your will. Your estate will be treated as having received taxable income in the amount of the bequest paid by the retirement plan assets.
- You may make the Foundation a partial beneficiary of your plan
and direct the balance to your heirs.
- The tax benefits of a lifetime gift from your retirement account are not as favorable as those for a transfer at death. Tax law may change (this website will keep you posted), but at present the IRS taxes withdrawals you make from your retirement account or IRA to fund charitable gifts, and it does not allow tax-free rollovers from your plan into a life-income gift.
How Do I Make a Gift of my Retirement Account Assets?
First, get the advice of your plan administrator and an attorney expert in retirement planning and charitable gifts.
Email us, complete the
personal illustration form, or call
us at 502-489-3533 so that we can assist you through every step
of the process.
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