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“Leave a Legacy” – Beneficiary Designation on your Retirement Plan

Published in the Robert Wood Johnson Foundation newsletter.

By Parag Patel Esq.

Your largest asset may be your retirement plan. But did you know that your retirement plan can be taxed TWICE at your death?

When you plan your estate, it may seem natural to automatically designate a child or other relative as the contingent beneficiary of the account after your death, then use other assets to make a charitable gift.

But there’s a tax trap in such an arrangement: 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. 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.

There is a sensible charitable alternative:

Consider naming the RWJ Foundation as the beneficiary of your retirement plan, and use your other non-retirement plan assets, not subject to income tax, to make gifts to your heirs. Since the RWJ Foundation is a exempt organization, it will not 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.

Distributions may be made to the RWJ Foundation outright or fund a charitable remainder trust or gift annuity that pays income to your heirs. Be sure to direct the gift to the RWJ Foundation through your plan’s beneficiary designation form rather than through your will. If you fail to do so, the assets will be included in your taxable estate.

Talk to your financial advisor and an attorney expert in retirement planning and charitable gifts for more information.