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Worst assets to leave heirs, may be the best for charities

Best assets to give to your favorite charity or charities?  Qualified Retirement Accounts: IRA, 401(k), SEP-IRA, Profit sharing, or 403B plans.  Why? They create a special tax inside your estate called IRD or Income with Respect to the Decedent or as I like to say " Disrespecting " those that have passed.  However, leaving these to charities leverages 100% to charity and zero to government.  If you leave these assets to children and other heirs (other than spouse), then taxed to the heir.  If the heir is in the top tax bracket or near it, then likely it will push heir to higher tax bracket.  Few if any take the "stretch IRA" approach.  According to Investor Words.com An Individual Retirement Account strategy designed to prolong or "stretch" the period of time over which earnings can be tax deferred. This strategy is used when an investor does not need all of the funds from the retirement account, and wishes to create an estate that can extend for generations. Beneficiaries will still need to take the required minimum distributions.

What could be the worst assets to leave to charities?  Depends on who you talk to on this one.  Some could argue for mortgaged real estate, and others say collectibles that are not going to be used by the charity, such as high end artwork sold immediately for cash at charity.  Still others may argue it would be cash, since cash is cash and did not leverage the opportunities to take other potential assets that would be taxed and under a gift not be taxed.

Example of leaving Individual Retirement Account to Children vs. leaving to charity:  $100,000 IRA left to child (assume adult, and employed) - what happens most is the lump sum distribution is made to this heir and adds taxable income on top of current income often pushing them into higher, if not the highest tax bracket.  So, someone in 15% or 25% bracket gets pushed for one year into 35% bracket (scheduled to go to 38.5% Federal alone).  So, the net received would be about $65,000 if no State Income Taxes.  On the other hand, charities would receive 100% of the otherwise taxable funds. So IRAs are great for charities, but not so great for family and others. For those of you over 70 1/2 taking Required Minimum Distributions RMD's you can opt for payment while living direct from your IRA to your charity- talk to tax adviser to see if this would benefit you.

Can you see that if the will or trust spelled out to give "cash" to charity at death and not other taxable assets how it potentially harms your heirs?  Something to think about and plan for as you work through your own estate planning process.

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Comment   |  7 years, 7 months ago from Maitland, FL