Some investments offer the advantage of sheltering the income from current taxation. Qualified retirement plans (IRA's, 401(k)'s, etc.), U.S. Savings Bonds, and commercial annuities are the most common examples. Income builds up inside the investment, and no tax is paid until the owner begins to draw out the funds, often at retirement.

While this tax-sheltering feature makes sense for most people, it can backfire if the owner of these assets dies with significant deferred income investments still in his estate. In this situation, the heirs who inherit the assets will pay the income taxes that the donor would have paid had he lived. And this income tax is in addition to any estate taxes due. This "double whammy" of taxation can reduce a bequest to one's family by as much as 80 percent.

For those planning a charitable bequest, it can be quite beneficial to make that bequest from tax-deferred assets. That's because when the assets pass to a charitable organization like the OSU Foundation, the charity is exempt from the income taxes that would have to be paid by a family member or other private individual.

As long as there are enough other assets in an individual's estate to provide adequately for family members, it can make good sense--and save income tax dollars, as well--to name the OSU Foundation or other charity as the survivor beneficiary of savings bonds, annuities, and tax-deferred retirement funds.

EXAMPLE: Sue has $100,000 in a retirement plan account and also owns $100,000 in stock. She intends to make a bequest of $100,000 for the Edmon Low Library Endowment and leave the rest of her estate to her daughter, Jeanne. Whether she leaves the stock or retirement plan assets to OSU, Sue's estate will receive a $100,000 charitable estate tax deduction. However, the income tax consequences will be significantly different, depending on which asset she contributes. If Sue makes Jeanne the primary beneficiary of her retirement plan, Jeanne will have to include the entire distribution in her taxable income, reducing the value of Sue's bequest by as much as 40 percent. On the other hand, by naming the OSU Foundation as the beneficiary, Sue maximizes her giving ability because, unlike her daughter, the Foundation will not have to pay tax on the deferred income. An added benefit to this strategy is that Jeanne will inherit her mother's stock at a stepped-up cost basis of $100,000, the value on the date of Sue's death. Jeanne will then be able to sell the stock without paying any income/capital gains tax.

Note: While assets with deferred income are excellent for testamentary gifts, they are usually not appropriate for lifetime contributions. When these assets are given during life, the donor is required to recognize the accumulated income at the time of the gift.