Many people plan wisely for the future by setting aside a portion of their income in retirement plans. Whether in an employer provided account or a personal account, these funds will supply income during retirement years.

Most of these accounts will still contain funds when the owners pass away. In fact, a financial planning rule of thumb says that 90 percent of the people over 90 years of age still have 90 percent of their retirement funds’ balance.

Unfortunately, many retirement plan owners do not give much thought to what happens to the funds after they have passed away. Consequently, much of what the owner intended to pass on to his or her beneficiaries is lost in taxes.

Distributions of retirement funds at death to anyone other than a spouse are subject to federal and state income taxes, as well as federal and state estate taxes. This combination of taxes significantly reduces the amount of funds available for beneficiaries.

However, giving to EMM through a retirement fund can reduce or eliminate these taxes. In some cases, giving away retirement funds can actually increase the amount of funds available to beneficiaries. Following are a few examples of how you can combine your retirement planning with charitable giving to meet your financial goals and build God’s kingdom.


Combine your retirement plan with life insurance
If you have named your children and EMM as partial beneficiaries of your retirement plan, some of the retirement plan balance you intend for your children will be paid in taxes to the IRS.

An alternative is to begin withdrawing from the retirement plan to purchase a life insurance policy. The policy is equal in value to the balance in your plan and names your children as the beneficiaries. You can then leave the entire balance of your retirement plan to EMM. Because your children can receive the proceeds of a life insurance policy tax free, income taxes are reduced, and your children receive more of the funds. The gift to EMM is also increased.

Example 1
Robert López has four children. He has named each child and Eastern Mennonite Missions as equal beneficiaries of his retirement plan of $300,000. Assuming a tax rate of 28 percent, the children will each retain $43,200 of their $60,000 distribution. EMM is not subject to taxes and will retain their entire distribution of $60,000. The IRS will receive $67,200 in taxes paid by the four children.

After careful planning, Robert decides instead to begin making withdrawals from the retirement plan to purchase a life insurance policy for $300,000, naming his children as beneficiaries. He names EMM as the sole beneficiary of the retirement plan.

At Robert’s passing, the children will each receive $75,000 from the life insurance policy. These funds are transferred outside the estate and are not subject to income tax. EMM receives the balance of the retirement account, none of which is subject to income or estate taxes. This plan allows the children and EMM to receive more funds, and eliminates all of the taxes due.


Reallocate the assets in your estate plan
A second alternative is to bequeath your retirement plan to EMM and designate other assets in your will to your beneficiaries. If you are planning to make a gift through your estate to EMM, it may be better for your beneficiaries if you instead give your retirement account to EMM.

Example 2
Jean Nolt has a retirement plan with a balance of $300,000 and also owns stock valued at $300,000. The retirement account will be distributed to her three grandchildren. Her will directs the stock to be gifted to EMM.

Under this plan, EMM will receive the stock valued at $300,000, but the grandchildren will only receive $216,000 of the retirement account. Her grandchildren will pay the remaining $72,000 in income taxes.

Jean decides to modify her plan. She instead names EMM as the beneficiary of her retirement plan. She then modifies her will to name her three grandchildren as the recipients of the stock.

This allows the entire balance of the retirement account to pass to EMM without any reduction for taxes. When the stock is transferred to her grandchildren, only the estate taxes are due. This simple reallocation of assets provides a larger gift to her grandchildren and maintains her gift to EMM.

Note: Jean must make the change with her retirement plan administrator; the document on file with the plan administrator, not the will, controls how the retirement plan funds will be distributed.


Combine your retirement plan with a charitable remainder trust
A third alternative is to establish a charitable remainder trust that will receive the retirement plan funds at your death. The trust then distributes income to the beneficiaries for a designated number of years (up to 20 years). When the trust ends, EMM receives the trust balance.

Moving the funds from the retirement account to the trust avoids income tax, and the estate will receive a charitable tax deduction for a portion of the funds placed in the trust.

Example 3
Wilson Abate has four children who are named as the beneficiaries of his $750,000 retirement plan. At Wilson’s passing, each child will receive a distribution of $135,000 and the IRS will receive $210,000.

Wilson decides to modify his plan. He establishes a charitable remainder trust. It will begin at his passing and last for 20 years. The trust will pay seven percent of its balance to the four children. At the end of 20 years, EMM will receive the balance in the trust.

The $750,000 transferred from the retirement plan to the charitable remainder trust will distribute $9,450 (after income taxes) to each child for the next 20 years. Each child will receive a total distribution of $189,000. In 20 years, EMM will receive the $750,000 trust balance.


Combine your retirement plan with life insurance
and a charitable remainder trust
A fourth alternative combines portions of alternatives one and three. In this alternative, you withdraw the total amount from your retirement plan. Because excise taxes are assessed on withdrawals that exceed certain dollar limits, you may need to make several withdrawals over a period of years.

After paying income taxes, you deposit the withdrawn funds into a charitable remainder trust. By placing the funds in a charitable remainder trust, you receive a charitable deduction, which helps to offset the taxes on the total withdrawal.

For several years, you use the income from the trust to pay the premiums on a life insurance policy. You designate the policy’s beneficiaries to be those who you had planned to benefit from your retirement plan.

When the policy reaches the point where it no longer needs additional deposits, you are able to retain the income from the charitable trust until your passing. The balance in the trust is then distributed to EMM.

Example 4
Elizabeth Stoltzfus has four children and a retirement plan worth $300,000. She decides to withdraw the full $300,000 from her retirement plan. After paying income taxes, she has approximately $200,000 remaining. She deposits the $200,000 into a charitable remainder trust. She receives a charitable deduction from creating the trust that helps to offset the taxes due on the $300,000 withdrawal.

The trust pays Elizabeth seven percent of its balance for the remainder of her life. After her passing, the balance in the trust will be available for EMM to use in its ministries.

If the trust earns a seven percent return, Elizabeth will receive $14,000 from the trust each year. For ten years, she will deposit this $14,000 into a separate trust she establishes to own a $300,000 life insurance policy that names her four children as beneficiaries. After ten years, the insurance policy will be self-funding, earning enough money to cover the cost of the annual premium. Elizabeth is then able to use the $14,000 income from the trust as she pleases.

When Elizabeth passes away, EMM will receive the $200,000 in the charitable trust, and the children will each receive $75,000 from the life insurance policy. Neither EMM nor the children will need to pay any income or estate taxes on these distributions.

The children each receive more than they would have received directly from the retirement plan. Additionally, Elizabeth will receive a flow of income for the remainder of her life and make a significant gift to EMM.

For many people, retirement accounts will be the largest – and most heavily taxed – assets in their estates. However, combining charitable giving with retirement account planning can reduce the impact of taxes, provide a gift for EMM, and increase the amount of funds distributed to your beneficiaries.

These are just a few examples of how you can use retirement plans to further God’s kingdom and help you meet your financial goals. If you have additional questions about retirement plans, or if you would like to discuss in detail how donating a retirement plan may be appropriate for your situation, please feel free to contact EMM’s director of financial resources at 717 898-2251.

Other financial planning resources available from Eastern Mennonite Missions: Charitable remainder trusts; Gifts of stock; Gifts of real estate; and Charitable gift annuities.

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Examples based on rates adopted on 5/12/03 by the American Council on Gift Annuities. Please contact Eastern Mennonite Missions’ director of financial resources for current rates. Examples are fictitious and do not refer to actual transactions.

Eastern Mennonite Missions is not engaged in rendering legal or tax advisory services. For legal or tax advice, please consult your own professional advisor.

Other ways to give

Bequests
A bequest is the simplest planned gift, given after your death through a directive in your will. It can be in the form of real estate, retirement funds, or stock.


Charitable Gift annuities
A charitable gift annuity allows you to make a contribution to EMM in exchange for a fixed flow of income for the rest of your life. more >>


Charitable remainder trusts
A charitable remainder trust allows you to make a contribution to EMM, with flexible options for how you want EMM to manage the trust’s assets. You may name yourself, or anyone else you choose, as the beneficiary. more >>


Life insurance and retirement plans
These assets offer various opportunities for benefiting your family and EMM’s family. The rules regarding gifts of retirement funds continue to change. To discuss the options available, contact Don Brubaker at 717 898-2251.