Amounts contributed on a pre-tax basis to "qualified plans" such as a pension, profit-sharing, 401(k) plan, Keogh plan, or an IRA (including a rollover IRA), and the earnings attributable to those amounts, will be subject to income tax when withdrawn by the plan participant or by his or her beneficiaries. To the extent any balance in such a plan is payable after death, it will be included in the participant's estate for federal estate tax purposes. Thus, these benefits may be subject to both income and estate taxes. Although there is some deduction available for income tax purposes if these benefits are subject to both taxes, that deduction only partially reduces the burden of this "double" tax.
If these benefits are subject to estate and income taxation at the top federal rate brackets, family members may net less than $.25 for each $1 of benefits. This amount will be further decreased by applicable state taxes, and by any excise tax on "excess retirement accumulations". If those benefits were instead distributed to a charity at death, neither income taxes (since the charity is a tax-exempt entity) nor estate taxes (because of the estate tax charitable deduction) would be payable with respect to the benefits.
Thus, many of our clients are opting to leave all or a portion of their retirement plan benefits (especially after the death of both husband and wife) to charities in order to have 100% of these funds available for charitable beneficiaries, instead of less than 25% available for non-charitable beneficiaries. In appropriate circumstances, families may consider paying these benefits into private foundations, philanthropic funds, or supporting organizations of public charities so that the family can continue to be involved in the charitable disposition of the funds.
If a charity is designated as a plan beneficiary, special care must nevertheless be taken in structuring the beneficiary designation, especially if less than all of the remaining qualified plan benefits are being distributed to the charity, since the disposition to charity may accelerate income tax consequences to other beneficiaries.
