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Your path to this gift:
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 to the University of California, Irvine.
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But there's a tax trap in such an arrangement:
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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.
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The result of this double taxation? For estates fully subject to the estate tax, up to 70 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*
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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 49% federal estate tax, and that your heir is in the 35% income tax bracket:
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*This example is based on a factor that changes yearly. Contact our office for a personal illustration based on the latest rates.
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IRA
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$500,000
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Less 49% estate tax
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(245,000)
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Transfer to heir
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255,000
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Less 35% income tax
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(89,250)
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Net to heir
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165,750
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Total tax %
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67%
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There is a sensible charitable alternative:
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Name UCI 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.
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Distributions may be made to UCI outright or 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 UCI 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 UCI 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 949-824-8384 so that we can assist you through every step of the process.
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