Levi Hall at University of Chicago

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Gifts of retirement plan assets

Many Americans hold a significant percentage of their wealth in their retirement plan accounts, such as a 401(k) plan or IRA. The assets in these accounts grow tax-free over time but have significant built-in tax liability.

Accordingly, a large percentage of the assets in the accounts will be lost to tax if the account is left to someone other than a spouse upon the account owner’s death; however, using these assets for charitable gifts at death can be advantageous for tax purposes.

Benefits of giving retirement plan assets

Income tax is triggered when the assets are taken out of a retirement account—either when the account owner makes a withdrawal during his or her lifetime, is subject to Required Minimum Distributions (RMDs), or when the account is distributed upon the account owner’s death.

Additionally, if there are assets inside the account when the account owner dies, they will be included in the account owner’s estate for estate tax purposes. The income and estate tax liability amounts to a double taxation on the assets in the account.

Currently the combination of federal estate and income taxes on a retirement account can exceed 64 percent. Combined with state death taxes and income taxes the tax liability on the assets could total 80 percent.

How a planned gift affects tax liability

For example, if an account owner named her son as the beneficiary of her retirement account that is worth $1,000, after payment of federal and state income and estate tax, he may receive only $300. The federal and state governments would receive 70 percent of the mother’s account.

Contrast this scenario to a situation where the account owner designates the University as the beneficiary of her retirement account. The account owner’s estate would receive a charitable deduction for the entire amount of the account, which will leave a larger balance of the estate for the donor’s other intentions.

In addition, because the University is a tax-exempt charity, it will not have to pay income tax on the distribution and would receive the entire $1,000.

Making a gift of retirement plan assets

You can name the University of Chicago as beneficiary of part or all of your account simply by requesting a form from the plan’s custodian.

If you have already taken steps to name the University as a beneficiary of a retirement account, please contact us to let us know.

We encourage you to consult with your legal and tax advisers for more information about the consequences of your gift.


Disclaimer: The information above is intended to assist you in your tax, estate, and charitable planning. It is not legal advice and should not be relied upon as such. Learn more about the information on this website.