Beneficiary designations can be a great way to leave a forever gift to your favorite Catholic cause, avoid estate taxes and lessen inheritance tax for heirs. A person’s life-long impact on the world does not need to stop at their death. Naming a favorite Catholic cause’s endowment fund as a beneficiary on a life insurance policy, or on any investment accounts ensures that their impact on the organization will continue long after they are gone.
Make Your Giving Decision Work Best for You
Beneficiary designations are easy to set up and don’t require donors to change their will. They also are a flexible option that may be changed at any time. According to Michael J. Matejcek, CMFC, RTRP, a Financial Advisor with Financial Strategies and Designs, Inc. in Allentown, beneficiary designations are an important piece of an individual’s estate legacy plan.
“Most people have a mixture of types of assets in their estate,” Matejcek said. “The key factor is people need to select the right beneficiary asset that works best in achieving their legacy goals.”
After understanding an individual’s legacy goals — who or where a person wants to leave their assets — Matejcek works with his client to map out a strategy that maximizes assets and minimizes tax implications to the estate and beneficiary recipients. Common assets that Matejcek works with include real estate, investments, bank accounts, annuities, IRA’s, 401K’s, and 403B’s.
“Not all of these assets are equal when it comes to the income tax system,” he said. “When I work with a client who has a desire to leave gifts to family members and to charity, I want to make sure it is done in the most tax efficient way as possible.”
Tax Implications of Non-Retirement Assets vs. Retirement Assets
Matejcek points out that the value of most non-retirement investments and real estate assets included in an individual’s estate are adjusted at the time of their death. Because real estate and investments fluctuate in value, they often gain in value at the time of the owner’s death.
The original cost of the asset, referred to as the basis by tax accountants, is subtracted from what these assets are sold for after the owner’s death. The basis is adjusted to equal the fair-market value of the asset as of the date of death of the owner. Matejcek said this “step-up in basis” means that the recipients of these assets will have little or no gain on the asset’s value when sold and little or no tax implications.
“With the exception of federal and state inheritance taxes, these are virtually a tax-free asset,” Matejcek said.
The scenario is different with retirement accounts. Assets held in IRAs, 401ks, 457 or 403b plans do not get a “step-up in basis” upon the owner’s death, Matejcek said. “When retirement fund assets are inherited, and a distribution is received by a beneficiary, every dollar is considered taxable income,” he said. However, when the beneficiary of retirement account assets (and non-retirement assets) is a qualified 501(c)(3) organization (most charities), the charity and the estate pay no income tax on those assets. These assets also are not included in probate when calculating the inheritance taxes for the estate.
Endowments Provide Multiple Benefits for Beneficiary Designations
When mapping out an estate legacy gift plan, a beneficiary designation to an endowment fund with the Catholic Foundation of Eastern Pennsylvania has multiple benefits.
“In the end, the donor pays less estate taxes and their gift essentially lives on helping their favorite Catholic cause fulfill its mission forever,” Matejcek said.
Matejcek stresses the importance of working with a trusted estate planning/taxation attorney and a financial advisor to put together a solid plan with the proper estate planning documents (will, power of attorney, medical directives, funeral plans, etc.) and proper beneficiary designations on retirement and non-retirement assets.
“Why leave anything to chance and put undue stress and tax burden on your family?” Matejcek asked. “A well, thought-out plan with all the documents and beneficiary information in place gives everyone piece of mind now and later. Plus you can make something good happen for your favorite Catholic cause.”
Mike Matejcek has 30 years working in the financial services industry and has helped hundreds of clients successfully navigate the complicated world of estate legacy planning as a financial advisor. He may be reached at email@example.com.