Charitable gifts of retirement plan benefits.

• Author: Schramka, E.G.

When an individual dies, more than 75% of the total balance of his retirement plans (including profit-sharing plans, Sec. 401(k) plans, Sec. 403(b) plans, individual retirement accounts (IRAs) and defined benefit plans) could be eaten up in the form of taxes. These assets are potentially subject to the following taxes:

* Estate tax: The estate tax rates start at 37% for estates valued at over $600,000 and go up to 55% (plus an additional 5% tax on estates valued at over $10 million but not over $21.04 million).

* Income tax: When plan distributions are made to beneficiaries, the distributions are subject to income tax. The maximum Federal income tax rate is 39.6%. The beneficiaries are entitled to a deduction for any Federal estate tax attributable to such income.

* Excise tax: A 15% excise tax applies to a retirement accumulation that exceeds the amounts in aD of an individual's retirement plans over the present value of an annuity paid over the individual's life expectancy as of the date of death. The estate is allowed a deduction for the excise tax in computing the amount of the estate tax.

* Generation-skipping transfer (GST) tax: A flat 55% GST tax applies if a distribution from the retirement plan is part of a direct skip, taxable distribution or taxable termination.

When confronted with the possibility of giving more than 75% of their retirement plan assets to the government, individuals may want to consider naming a charity as a beneficiary of all or a portion of these benefits.

The advantage of naming a charity as the primary beneficiary is that the retirement plan interests will not be subject to estate or income taxes. However, the 15% excise tax on excess retirement accumulations will not be avoided and if the participant is married, the spouse must consent in writing to waive her rights to benefits under the retirement plans. (This requirement does not apply to IRAs.)

If an individual wants to name a charity as the beneficiary of only a portion of a retirement plan, that portion must be placed in a separate account by the earlier of the individual's date of death or the year the individual turns age 70 1/2 (the individual's required distribution beginning date). In the alternative, the individual may, prior to reaching age 70 1/2, roll over his retirement plan assets into separate IRAs, one earmarked for charity and one earmarked for the family

If the individual is married and is concerned about providing for his spouse's...