In recent weeks there has been a local effort from the Valley Gives Back, a local planning initiative, encouraging people to name a nonprofit as a beneficiary on their retirement account. As a financial consultant for more than thirty years, I can say that this is a great way to both remember a charitable organization and save your heirs some taxes. But, make sure you understand how it works.
Your retirement plan may be your largest asset. With proper planning and a little luck, you and your spouse will not spend all of it during your lifetime, so there could be a substantial amount to pass on to your heirs. That can however come at a cost to them.
Typically, the balance left in your retirement account has not yet been taxed. The IRS calls this income in respect of a decedent and, if you bequeath that balance to your heirs, the IRS could subject it to both income and estate tax. This potential double taxation can consume upwards of half the value of your account, or more in some cases.
By thinking charitably, you and your heirs can come out ahead. You can name your favorite nonprofit organization as the beneficiary of your retirement plan, and use other assets, not subject to income tax such as life insurance, bank accounts, and so on, to make gifts to your loved ones.
The nonprofit organization won’t pay income tax on the distribution, nor will the plan balance be included in your taxable estate.
It is critically important that, if you do decide to name a nonprofit as a beneficiary to your retirement plan, that you update your plan’s beneficiary form. Simply noting this designation in your will is not enough. Updating your beneficiary form only takes a few minutes and it can keep your money out of probate. No attorneys, no hassle for your heirs, no extra expenses tacked onto your estate, and there is no limit to the amount you can leave.
If you decide to include a nonprofit in your estate plan there are two reasons to be sure to tell the organization. The nonprofit will need to follow up with your plan administrator upon inheritence as the institution is not obligated to notify the charity. You should also tell the nonprofit because they will likely want to have the opportunity to thank you long before your gift comes through.
Beneficiary designations are a meaningful way to remember your favorite nonprofit that costs you nothing during your lifetime. This type of a gift reduces taxes your heirs will face and allows you to continue taking withdrawals from your retirement account. Better yet, this is entirely revocable if things change and you need to use your assets.
If you have questions or would like to see if planned gifts, especially beneficiary designations, are right for you, speak with your attorney, accountant, or financial planner to learn more.
The writer is a Shelton resident.
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