Because retirement account assets are subject to uniquely high taxes, they become a particularly effective vehicle for charitable giving. Making a gift is often the only way to negate what can be confiscatory taxation.
Distributions from retirement plans are subject to income taxes— and there is no way to avoid making distributions because tax laws require that distributions be made once you reach a certain age. Furthermore, whatever is left in the account when you die and your beneficiary is a nonspouse is subject to estate and generationskipping taxes—as well as continued income taxes. In fact, combined income, estate, and generation‐skipping taxes often exceed 75 percent when retirement plans are left to a nonspouse. By designating Cato the recipient of any benefit remaining in your retirement plans, you can make a highly tax‐efficient gift. Cato, as a charity, will not have to pay income taxes. Plus, your estate will get an estate tax charitable deduction if it’s large enough to be subject to estate taxes.
One important reminder: retirement assets do not pass under your will. They pass via beneficiary designation forms. So having an up‐to‐date will is not enough. You must remember to do the extra paperwork required for retirement assets.