Retirement Plans

Many alumni and friends of Washington University have participated in qualified retirement plans for many years in preparing to retire. You may be one of them. You have watched your fund grow, tax-free. In fact, many are surprised by the rate of growth in their accounts and by the size of the accumulation.

For many people, these retirement accounts are their single largest asset, and they plan to leave the remainder of their retirement assets to their children or other heirs.

The disadvantage of leaving your remaining retirement assets to heirs (other than your spouse) is the tax consequences. Retirement benefits given to your heirs will be taxed as ordinary income, while they can be passed to your spouse without immediate tax. In addition, if all your assets are significant enough to warrant the payment of estate taxes, your retirement funds will be liable for both income and estate taxes upon your death. In other words, after taxes, your heirs could receive one-third of the total or less. The exact portion depends in part on the size of your estate. Please see the following illustration.

TO ILLUSTRATE THE TAX PROBLEM created by a retirement plan, assume that you will have $100,000 in your retirement plan that you will not use during your lifetime. If you were to leave this amount to an individual other than your spouse, your $100,000 total could be diminished by $50,000 in federal estate taxes and by another $20,000 in income taxes. People with larger amounts in their retirement plans and/or higher amounts of other assets may face even higher tax rates.

On the other hand, both estate and income taxes can be avoided if the $100,000 is given at death to a tax-exempt charitable organization like Washington University. Many retirement plans allow you to give all or a defined portion of your accumulation at death to a charitable organization so that your gift will not be reduced by significant taxes. If other assets, such as highly appreciated securities, are bequeathed to an individual, that person does not pay income tax on receipt of the bequest. Your heirs also benefit from the stepped-up basis on the stock without having to pay tax on capital gain.

In addition, you can provide for your heirs too. There is an excellent tax-wise charitable gift alternative that can provide for your heirs through your retirement plan assets while supporting Washington University after your death. By having all or part of your remaining retirement assets placed in a Washington University Charitable Remainder Trust, you can provide income for life or for a specified period of years--depending on the ages of the beneficiaries--beginning upon your death. Many financial advisers suggest that such a trust is the only way to share benefits from your retirement plan with your heirs and with a charity without the amount being reduced by substantial taxation.

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