Tax Planning to Maximize Your Legacy
Most individuals have planned through their estate documents to leave all their assets to their spouse and then split them amongst their children or other family members. And while this is certainly common practice, it does not always align with their personal values for charitable giving. In fact, it’s not uncommon to see someone give 5-10% of their income every year to charity and then give 0% of their estate after they die.
Sometimes, I see a will or a trust that leaves funds to a church but beneficiary forms for retirement accounts that go only to people. This is an area where considering which assets go to whom can make a big impact.
Consider Jim, who has a $500,000 house, $1,000,000 in an investment account, and an IRA worth $100,000. His will says that $100,000 of his estate should go to his church with the remainder split evenly between his two daughters. The beneficiary form for his IRA says it should be split evenly between his two daughters.
When he passes away, the IRA is split 50/50 between the daughters, and the house is sold for $500,000 and added to the investment account for an estate of $1,500,000. From there, $100,000 goes to his church and the remaining $1,400,000 is split evenly between his daughters. His daughters withdraw the IRA funds over time, paying 30% taxes on the withdrawals, making the $100,000 worth $70,000 after-tax. The church gets $100,000 and his daughters get $1,470,000 on an after-tax basis.
Now consider that instead of writing his church into his will, he made the beneficiary of his IRA his church. The church would inherit the IRA and would not pay taxes on the withdrawal because of its tax-exempt status. The church gets $100,000 and his daughters get $1,500,000 after-tax, $30,000 more than the previous strategy.
Considering including the charities you care about in your estate planning can help align your core values with your finances. And considering which assets each beneficiary should get can help maximize your financial legacy.
Happy Planning,
Alex
This blog post is not advice. Please read disclaimers.