A dual‐​career couple, Ralph worked as a marketing executive and Eliza as a lawyer. Always careful planners, they invested after‐​tax dollars into their personal portfolio and stuffed pre‐​tax dollars into their respective 401(k) plans. Recently retired, they rolled their 401(k) dollars into IRAs and, consequently, had to decide who should be named as the beneficiary of their IRAs. Given that IRAs—and retirement assets in general—are subject to both income and estate taxes, they were astounded to learn how big the tax bite can be.

Fortunately, with the help of a good financial adviser, they managed to craft a happy solution. Their adviser pointed out that IRA assets pass free of income and estate taxes when a charity is named as the beneficiary of an IRA. So Ralph and Eliza decided that their personal investment portfolios should provide a sizable inheritance for their three children, whereas Cato would be the designated beneficiary of their rollover IRAs. Aware that their IRAs may be reduced by required (IRS rules) lifetime distributions, they are happy that whatever is “left over” can pass to Cato free of both income and estate tax.

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.