Retirement Plans

Qualified Retirement Plans — 401(k) and 403(b) plans, IRAs, Keoghs, and others — are many people’s major retirement savings vehicles.  

Individuals contribute thousands of dollars to their plans each year, often tax-free, making these plans their largest single asset by the time they retire.

Yet, the death of the owner can result in high, often ruinous, taxation to these assets. Unlike almost any other type of asset, these plans must often pay income tax, in addition to possible estate tax. For plans left to anyone other than a spouse, these combined taxes can easily approach 70 percent.

Retirement plans that designate VMFA as beneficiary reduce income and estate taxes, and the tax savings will pay for most of the gift.  

Here is an example:
Mrs. Monet dies owning a 401(k) plan inherited from her husband. Plan assets total $700,000. A museum supporter, she nevertheless leaves the retirement plan to her children and the appreciated stock worth $700,000 to VMFA.

Because of her estate’s size, the plan is subject to estate tax at the 40 percent rate. Add the income tax, and her retirement plan could undergo taxation of up to 70 percent, as follows:

 $700,000.00     Total balance
-$210,000.00     Income tax at 30%
 $490,000.00
 $196,000.00     Estate tax at 40% rate
 $294,000.00     Remains of account after combined taxation

Less than half of Mrs. Monet’s retirement plan ends up with her children, where she wanted it.

A Better Result for Everyone
Instead of leaving the 401(k) plan to her children, Mrs. Monet designates the retirement plan balance for VMFA. The retirement plan escapes both income and estate taxation as a charitable contribution. This arrangement also benefits her children, who inherit the $700,000 stock portfolio: 

    •  Free of taxation on any capital gain in the stock at their mother’s death, since
        the basis in the stock is “stepped up” to its fair market value as of her death.
    •  Protected from any federal estate tax by the currently applicable estate tax
        credit.

To designate part or all of a retirement plan for the museum, take these simple steps:

    1.  Contact your plan administrator by obtaining the name and address from
         your employer or your own records. 
    2.  Obtain a copy of the designation of beneficiary form, and list the museum for
         whatever share of the balance you desire. 
    3.  Note your designation in your own records, and inform Steven Toth,
         Manager of Planned Giving, who will gratefully enroll you in The
         Heritage Society.