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 Metropolitan State University Foundation 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.
Please call Deb Vos at 651-793-1802, or e-mail us at firstname.lastname@example.org for more information.