If you are like many people; you may desire to make a charitable gift as part of your estate plan, a way to give back, when your need for assets is done. This kind of planning is done when retirement is also on our minds.
Most of us hold retirement savings in an IRA, 401(k) or 403(b). Because of the way these funds are used, you may not exhaust all of your retirement money during your lifetime. So, the question is, “What will I do with my unspent retirement savings?”
A Common Solution
Most people designate family members as beneficiaries of retirement accounts. The problem with doing this is that much of your savings may never go to your loved ones. By giving your unspent retirement savings to your family (other than your surviving spouse), your retirement savings will be taxed. First, if you have a taxable estate, your estate will pay tax on the asset. Second, your family members will pay tax at their ordinary income rate resulting in very little of your remaining money actually going to your family.
A Better Solution
When leaving assets to family, it’s best to give your family assets that step-up in basis at death such as stock and real estate, these assets may be received and sold by your family without paying any tax. Your retirement assets actually make a better gift to charity because a charitable organization can receive the entire asset tax free and make use of it to further its mission.