Retirement Accounts

Qualified Pension Funds and Individual Retirement Accounts
While qualified tax-deferred retirement funds are an excellent way to build a retirement nest egg, these same funds are not efficient wealth transfer vehicles. In fact, many people are surprised to learn that tax deferred retirement funds - including 401(K)'s Keough plans and individual retirement accounts (IRA's) - can trigger income, estate and generation skipping taxes when these funds pass to the next generation. In some instances, taxes can erode as much as 85% of a retirement fund's corpus!

For people who have interest in leaving a charitable legacy, these same funds make excellent tools for creating planned gifts. In most cases, it is easy to change the beneficiary designation with the plan's administrator. (In Texas, the spouse must also sign a change to a non-spousal beneficiary.) If your spouse is named as the retirement fund's beneficiary, consider adding your charity as the contingent beneficiary after your spouse's death. In most instances, this will eliminate the estate and income taxes that would be triggered if the asset were passed to non-spousal heirs.

Another option is to use your retirement funds to establish a charitable remainder trust in your will (a testamentary provision). While such a vehicle may not completely eliminate estate taxes, it can provide income to another generation, reduce estate taxes and eliminate income taxes that would be due on a direct distribution of the retirement funds.