Gifts of Retirement Plan Assets

By naming CalArts as survivor beneficiary of your qualified retirement plan, you can improve your estate's overall tax consequences and increase the amount passing to your children or heirs. A qualified retirement plan works well for saving for retirement, but not for passing assets to heirs. Retirement plan assets are subject to multiple layers of taxation at the owner's death, in the form of federal and state estate tax as well as income tax. As a result, retirement assets are taxed much more heavily than other estate assets. If left to a non-spouse, taxes can claim in excess of 75 percent of a plan's accumulations.

However, careful planning for the disposition of retirement plan assets will avoid unnecessary tax costs. By naming a charity as survivor beneficiary of your retirement assets, the gift becomes completely exempt from estate tax, income tax, and generation-skipping transfer tax, permitting you to make your gift at very low actual cost to your heirs. If you intend to leave a legacy to CalArts through your will, prudent planning might call for you to make your gift from retirement plan assets instead, leaving the lesser-taxed assets to your family.

Example: Bernard, a widower, is planning his estate. He intends to bequeath $400,000 to CalArts through his will. His daughter is named as survivor beneficiary of his IRA, which contains $400,000. Bernard's gift to CalArts will result in no estate or income taxes. The IRA will pass to his daughter without estate taxes because it falls within the estate unified credit amount, but it will be subject to income tax when the daughter receives it. At a combined federal and state income tax rate of 35 percent, the daughter will receive only $260,000 from the IRA. However, if Bernard rearranges his estate to bequeath $400,000 to his daughter through his will, and name CalArts as survivor beneficiary of his IRA, then Bernard's gift to both CalArts and his daughter will be free of all estate and income taxes. This tax-wise arrangement saves $140,000 in taxes for the benefit of Bernard's daughter. This example demonstrates the critical importance of thinking about the survivorship designations of your retirement plans in light of your overall estate planning.

If you have any further questions, please contact Bill Kramer, Executive Director of Development, at (661) 253-7740 or email bkramer@calarts.edu. [1]