Tax laws vary by state, but because tax issues come into play
when an individual is named beneficiary of IRA or 401(k) assets,
they can be considered the unwanted inheritance.
The Unwanted Inheritance
Once Martha Elliott finalized her estate plan and chose to leave
her IRA assets to her favorite niece, she never considered making a
change.
Her niece Sandra, although appreciative of Aunt Martha's
generous intent, wishes her aunt would have known that a beneficiary
change would have been a change for the better.
Here's why: When an individual like Sandra inherits IRA assets,
she must pay income tax on the inheritance. On an estate worth more
than $2 million (the 2008 qualifying figure), estate taxes also
apply. Between the income and estate tax bills, individual
beneficiaries may be left with only one-third of the original
gift.
"People with estates that will be subject to the estate tax are
making a huge charitable gift of their retirement assets, whether
they like it or not. They will be contributing upwards of 65
percent—and in those states that have a state estate tax, upwards
of 82 percent—of those assets to federal and state taxing
authorities, who will spend the money as they see fit," says
Christopher Hoyt, professor at the University of Missouri (Kansas
City) School of Law.
Nonprofits, however, are not subject to the same tax rules. As a
tax-exempt entity, an educational institution that is named
beneficiary of IRA or 401(k) assets inherits without paying
tax.
Now Is the Time
If you've completed your estate plan, it's not too late to make a
simple beneficiary change. Consider naming St. John's University as
beneficiary of your IRA or 401(k) assets and giving other assets to
individuals. With this switch, you minimize the tax burden and
increase the value of the gifts you give to your favorite causes
and people.
For more information, contact Susan Damiani at (718) 990-7562,
or e-mail us at damianis@stjohns.edu