Getting More Out of your Retirement Assets

by : David Chazin

Getting More Out of Your Retirement Assets

By David N. Chazin
In conjunction with Sagemark Consulting, a division of Lincoln Financial Advisors, a registered investment advisor. Mr. Chazin is a regular contributor to PlannerConnect.

For years, you've been investing in an IRA or employer-sponsored retirement plan, and, thanks to the benefits of tax-deferred growth, you now have a considerable nest egg ï‚? enough to enjoy a comfortable retirement and pass a tidy sum on to children and grandchildren. Or so you think. Unfortunately, after taxes, only a small percentage of your retirement savings may be left.

The Tax Toll
Your retirement assets alone may be enough to trigger federal estate tax at your death. Every estate is entitled to an exemption that, in 2005, allows the first $1,500,000 of your assets to pass tax-free to anyone you choose. However any estate assets in excess of this exclusion amount that you give to anyone other than your spouse can be hit with an estate tax of up to 47%. And, while an unlimited federal estate-tax marital deduction lets any amount of assets pass to your surviving spouse tax free, retirement assets you give to your surviving spouse may be taxed later in his or her estate. You haven't avoided the estate tax; you've only postponed it.

In addition to estate taxes, your beneficiaries will have to pay federal income tax on any distributions of tax-deferred retirement assets they receive from your estate. These amounts are taxed at ordinary income tax rates, which currently range from 10% to 35%. State income taxes, where applicable, would claim even more. If your retirement assets pass directly to your grandchildren, a 47% generation-skipping transfer tax may also apply ï‚? in addition to any estate tax paid.

The bottom line is that, without financial planning, most of your retirement assets could end up going to the federal government. What can you do?

Give to Charity
If you plan to leave gifts to charity when you die, consider using some or all of your retirement plan assets to make those gifts. One simple and safe way to do so is to name a charity as the beneficiary of your IRA or retirement plan account. The value of the retirement assets will be included in your estate for estate-tax purposes. However, your estate can claim an estate-tax charitable deduction for the full fair market value of the assets the charity receives.

Naming a charity as beneficiary of your retirement plan also can eliminate any income-tax liability on the assets. While individuals who receive distributions of previously tax-deferred amounts from retirement plans must pay income tax on the distributions, many charities are tax-exempt and, thus, don't have to pay income tax on distributions received from a donor's retirement plan.

Alternatively, you can give retirement assets to charity now and receive the added benefit of watching your money at work. To make your gift, you withdraw assets from your retirement account and donate them to charity. Any previously tax-deferred amounts you withdraw will be included in your income for the year, but there is an available income tax charitable contribution deduction (within tax law limits) that will reduce or eliminate the income tax on the withdrawal. The value of the assets, and of any future appreciation in those assets, is removed from your estate for estate- and generation-skipping transfer tax purposes.

Consider a Charitable Trust
While the assets you own outside of your retirement plan may seem sufficient to provide you and your spouse with a comfortable retirement, you still might be hesitant to give away your retirement assets. What if unexpected financial demands arise, and you or your spouse needs the income from your retirement plan? A charitable remainder trust may be the answer.

With a charitable remainder trust, you transfer your retirement assets to a trust set up for a charity of your choice. The trust pays you and your spouse, or someone else you've chosen, an annual income for life or for a set term. The trust ends with the death of the last income beneficiary or when the trust term expires. The charity receives any remaining assets.

As with an outright gift, a current income-tax deduction is available for the charitable gift you make through the trust. This deduction will offset some of the income tax that may be due on the transfer of any previously tax-deferred retirement assets to the trust. Your deduction is based on the present value of the assets the charity will eventually receive. The trust assets and any appreciation in those assets are removed from your taxable estate. You and the trust's other income beneficiaries will have to pay income tax on the annual payments you receive from the trust.

Another strategy is to name a charitable remainder trust as the beneficiary of your IRA or other retirement plan account, with your spouse as the income beneficiary of the trust. Your estate will not have to pay any estate tax on the retirement assets because of the potential marital and charitable deductions.

Protect Your Wealth
Many forward-thinking people like the idea of transferring a portion of their estate to charity at full value, rather than transferring a much smaller after-tax value to family members who may already have been provided for through other planning. However, if you are concerned that family members could need your retirement assets in the future, you might want to use an irrevocable life insurance trust as a wealth-replacement strategy.

You can arrange for a trustee to purchase insurance on your life that will replace the inheritance your family is giving up because of your charitable donation. As long as you have no incidents of ownership in the insurance policy, the proceeds won't be included in your taxable estate. Nor will your children have to pay income tax on the insurance proceeds. Essentially, your children or grandchildren receive an inheritance they can use instead of your retirement assets.

Use a QTIP Trust
Another popular planning strategy is to name a qualified terminable interest property (QTIP) trust as your retirement plan beneficiary. With a QTIP trust, you can give your surviving spouse a life income from your retirement assets and choose who will receive those assets after your spouse's death ï‚? your children or grandchildren, for instance. In that way, you can be sure your assets will pass to your children, even if your spouse should remarry after your death.

A QTIP trust can save taxes, as well. Assets in a properly structured QTIP trust qualify for the marital deduction. Thus, the retirement assets to be distributed to the QTIP trust will not be subject to federal estate tax when you die. Assets remaining in the trust will be included in your spouse's estate, and your spouse's estate may have to pay estate tax on them. However, your spouse's exemption amount will be available to offset tax on some or all of the assets that will later pass to your children or grandchildren.

Everyone's situation is different. The strategies discussed here may or may not fit your situation. Please consult a professional advisor before implementing any of the strategies we have discussed. Retirement plan distributions are subject to complicated tax rules. You don't want to make a planning error that could jeopardize your family's future financial security.

David N. Chazin is part of a network of qualified financial planners affiliated with PlannerConnect. You can reach him at, or to connect with a financial planner in your area please call (800) 318-7848, or visit the PlannerConnect website.

David N. Chazin, is a registered representative of Lincoln Financial Advisors, a broker/dealer, and offers investment advisory service through Sagemark Consulting, a division of Lincoln Financial Advisors Corp., a registered investment advisor,3000 Executive Parkway, Suite 400, San Ramon, CA 94583, (925) 275-0300. Insurance offered through Lincoln affiliates and other fine companies. This information should not be construed as legal or tax advice. You may want to consult a tax advisor regarding this information as it relates to your personal circumstances.