A Florida resident who is creating an estate plan might want to leave a portion of their assets to charity. However, it’s important that they do so in a way that lowers the overall tax burden.
As an example, a person might have three major assets that are worth $1 million each. The person might leave the home and the IRA to the children along with $900,000 from an after-tax account. The remaining $100,000 of the after-tax account would go to charity.
However, because the heirs must pay taxes on all IRA distributions, this is not the best arrangement. It would be better to make the charitable donation from the IRA and leave the after-tax account in its entirety to the children, particularly since the charity is exempt from paying taxes.
There are two points that are important to note in this strategy. One is that Roth IRAs and Roth 401(k)s are already after-tax accounts, so this does not apply to them. The other is that IRAs are passed using a beneficiary designation instead of a will or a trust. Therefore, it’s critical that these documents are coordinated so that a person’s wishes are carried out.
An attorney could help a client with the estate planning process and make sure that the legal elements are done correctly. Legal counsel may also explain the many functions that trusts can have in an estate plan. These tools can be set up to make distributions to beneficiaries only at certain milestones, support a family member with special needs or protect assets from creditors.