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Getting the 'Benefit' Out of Retirement Plan Benefits
It is not uncommon for a client's wealth to be concentrated in one or more retirement plans. As such, the disposition of such retirement plans, both during life and after a client's death, are often at the heart of the negotiations for a prenuptial or divorce agreement. Understanding the various income tax savings as well as the traps associated with retirement vehicles will give your clients the advantage when involved in such negotiations and thereby enable your clients and their beneficiaries to maximize the benefits of these valuable assets. This article offers a few practical strategies to help your clients get the maximum benefit from their retirement plans, with the lowest tax cost possible.
Do Some Good
If a client is charitably inclined, retirement plan benefits are the best assets to use for charitable giving. Assuming the charity is qualified under the Internal Revenue Code, then no income tax will be generated by distributions to the charity and an estate tax deduction will be allowed for the participant's estate. Further, if plan benefits are given to a charity during the participant's lifetime, no gift tax will be due. If the same retirement plan benefit is instead given to an individual beneficiary, the income and estate or gift tax costs would significantly deplete the asset. In other words, a retirement plan benefit is worth more to a charity than it is to an individual beneficiary. In addition, if a client is 70 1/2 years old and meets the other relevant statutory requirements of the Pension Protection Act of 2006, then he or she could exclude up to $100,000 of gross income by making a charitable contribution directly from his or her IRA to a qualified charity by the end of this year. If a client plans to make charitable gifts and has other assets to leave to his family, then naming a qualified charity as the beneficiary of a retirement plan could save the client significant taxes.
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