Financial Planning Fridays #107: Save Your Beneficiaries from Excess Income Tax!
How you allocate which assets go to heirs versus charities can dramatically affect the after-tax legacy your family keeps. By directing tax-deferred accounts to charity and other assets to heirs, families can minimize income tax on inherited wealth and maximize what loved ones actually receive.
How you allocate which assets go to heirs versus charities can dramatically affect the after-tax legacy your family keeps. By directing tax-deferred accounts to charity and other assets to heirs, families can minimize income tax on inherited wealth and maximize what loved ones actually receive.
Key takeaways
- The type of account heirs inherit determines how much income tax they'll owe.
- Directing tax-deferred retirement accounts to charity can eliminate income tax on those dollars.
- Leaving lower-tax assets to heirs preserves more of their inheritance.
- Coordinating beneficiary designations with estate goals can significantly increase the net legacy.
Today we want to talk with you about how you can better prepare to minimize taxes and aim to leave the maximum legacy for your family and favorite charities in a few simple steps by thoughtfully planning ahead. Please let me show you an example. A married couple has a total net worth of $10 Million and they would like to leave $2 Million to their local animal shelter and $4 Million to each of their children, Jake and Emma. Like most of us, they have a mix of investment accounts, including weRAs and Roth IRAs. This is what their plan looks like now: They have named their children as 50/50 beneficiaries of their IRAs and Roth IRAs, included a $2 Million gift to the local animal shelter in their will, and will leave the remainder of the estate to their children. As you can see, this plan will successfully leave $2 Million to the animal shelter and $4 Million to each of their children. However, with a few small changes we can save their beneficiaries $740,000 in federal income taxes! Here’s how: We named the animal shelter as the 100% beneficiary of their IRAs, because they are a 501(c)3 charity, they will not need to pay income tax on this gift. Jake and Emma now receive $4M each from accounts where the tax has already been paid and they will not owe any additional income tax on their gifts. This was a total tax savings of $740,000 with just a few simple adjustments. At Presilium we see examples like this all the time where a few small adjustments can result in a massive tax savings. Unfortunately, many people ignore their estate plans, often for years at a time, exposing them to the risk that their beneficiaries are out of date with their current wishes, or their previous planning is out of line with the current tax and estate laws. Now is a great time for you to review it! And we are happy to help at Presilium. Please schedule time with us to review your family’s estate plan and see if there are any updates you should consider to minimize the tax owed on your legacy. Thank you and we look forward to talking with you next Friday. Be on the lookout for our next Financial Planning Fridays episode .Subscribe to our Youtube Channel so you never miss an episode .Or contact us directly; schedule your 15-minute call with us today.
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