Ways to Give - Retirement Plan & IRAs
Millions
of Americans take advantage of retirement opportunities such as
IRA's, 401(k)s or other qualified plans. These plans allow people
to delay payment of taxes on money they save for future use. The
retirement funds then grow income tax free until the time of
withdrawal by the owner of the funds.
But retirement accounts can be subject to a
combination of federal and state income and estate taxes that can
seriously erode their value. Retirement savings are subject to
federal and state income tax as received, either by the retiree or
the retiree's heirs. Because retirement assets are included as
part of the taxable estate at death, the assets in qualified
retirement plans can also be subject to federal and state estate
taxes.
How it works:
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First, retirement savings are subject to
federal and state income tax as received.
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Second, the law requires that certain
minimum distributions must be made from individual retirement
accounts after the individual attains age 70 1/2.
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Third, at death, any remaining retirement
account balance is included in the calculation of the gross
estate. Consequently, retirement savings can also increase
federal estate taxes.
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Finally, after death, payments made from
retirement accounts to the designated beneficiaries will be
taxed as received by them at ordinary income tax rates.
While retirement assets are often overlooked
as potential charitable gifts, they can be a convenient,
tax-favored giving option for charitably minded individuals.
Careful planning for the disposition of retirement plan assets can
help to avoid undesirable tax costs. Properly structured gifts of
retirement account balances can improve the donor's overall tax
consequences, increase the amounts passing to heirs and escape
income and estate taxes.
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Example:
Ann, a widow, has recently died. She has one surviving child.
Her estate assets include her home, valued at $300,000 and an
Individual Retirement Account of $300,000. Ann's will divides
her estate equally between her child and the University of Maine
Foundation, specifying that her child will receive the IRA
account, and that her house will go to the University of Maine
Foundation for the benefit of the University of Maine.
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Result:
The house will pass to the Foundation with no estate or income
tax consequences. The IRA account given the child will not
create a taxable federal estate. However, the amounts paid from
the IRA will be taxed at the child's income tax bracket when
received. If the child is in the 31% tax bracket, the amount
remaining after income taxes of $93,000 will be $207,000. The
child's inheritance has been depleted by nearly 1/3!
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Better result:
Ann should leave her house to her child, who can sell it
immediately, with no federal income tax or capital gains taxes
if it is sold at Ann's date of death value. The child will
receive approximately $300,000. The Foundation should be
designated as beneficiary of the IRA account worth $300,000.
Because the Foundation is a tax-exempt organization, it will not
be subject to income taxes on the IRA distributions. This simple
rearrangement saves $93,000 in taxes and increases the amount
passing to Ann's heir!
The gift of a qualified retirement plan or IRA
is one of the most complex types of gifts. It is suggested that if
a donor is interested in this type of gift, one of our
professional giving officers should be contacted to work with the
donor, the donor's financial advisor, accountant, or lawyer.
The University of Maine Foundation has
professional giving officers ready to work with you and your
advisors. We may be reached Monday-Friday between the hours of 8
am and 5 pm by calling 1-800-982-8503 or via email at
umainefoundation@maine.edu.
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