I present a valuable story about a couple whose will did not line up with their wishes. Roger and his wife Cathy wanted to leave a charitable legacy. Their will directed 10% of their assets to their favorite nonprofit organization, with the balance split equally among their three children. Roger’s retirement accounts, which comprised half their net worth, listed their children as contingent beneficiaries if Cathy predeceased him.
Everything seemed to be in good order, but after hearing an evaluation of their situation, Roger and Cathy realized that, if nothing changed, their favorite charity would only get 5% of their estate. They learned that retirement accounts do not follow the dictates of the will. Additionally, they recognized their children would have to pay all the income taxes on inherited retirement dollars and get reduced amounts of non-retirement assets after the distribution to charity. Of course, that realization did not align with their original intent for their estate.
So, with help and guidance, Roger set to work making the appropriate changes to resolve the problem. First, he set up two IRAs and rolled retirement dollars into them. The first account was his charitable IRA, funded with enough money to pass at least 10% of their total estate tax-free to their favorite nonprofit. The second account was the children’s IRA. Cathy was the primary beneficiary of both, should he predecease her. Roger and Cathy established their favorite charity as the contingent beneficiary of the charitable IRA. When tax feasible, Roger converted dollars from the children’s IRA to a Roth IRA, thereby reducing the tax liability his offspring would have to pay on those distributed dollars.
Roger also resolved to start donating funds out of his charitable IRA to his charity as a Qualified Charitable Distribution (QCD) when he turns seventy and half years old. By doing so, he will be donating pre-tax dollars during his lifetime (see my recent blog entitled How Thanksgiving’s QCD Deadline Could Save You Thousands for more details on that strategy). Additionally, Roger and Cathy updated their wills so that all non-retirement assets go to their children.
All these changes helped Roger and Cathy accomplish their overall goal of giving 10% of their estate to their favorite nonprofit and splitting the residuary estate among the three children with, now, a much lower tax bill.
Naming a charity or charities as the beneficiary of a retirement account is a simple estate planning tool with a big impact. Charitably inclined donors can reduce taxes by bequeathing to qualified nonprofits’ property that would normally be subject to income tax liability for other beneficiaries. These designations cost you nothing during your lifetime and can be modified without changing your will. When constructed and maintained properly, the charities you love can get more, posterity can net out more dollars, and the government gets less in taxes. That’s an effective way to leverage your charitable giving, one to which Cathy would say, “Roger that!”
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