Last will and testament

Should you name a charity as your IRA beneficiary?

Money in a traditional IRA is tax deferred money.  Typically when money leaves an IRA there is income tax due and payable by the beneficiary.  But what if a charity receives the IRA?  A charity does not pay taxes, so the charity can receive the IRA proceeds without tax being paid on the money.

Choosing wisely which beneficiaries receive certain assets can make a big difference after taxes.  For instance, lets look at an example estate with a $100,000 IRA and $100,000 bank account with the goal of giving equally to a charity and an heir.  If the heir has a marginal tax rate of 30% then the heir will pay $30,000.00 in taxes if they take the $100,000 out of the IRA, leaving them with $70,000.00 and the charity with the $100,000.00 cash from the bank account.  Out of the $200,000 estate, only $170,000 is left after taxes.  If the gifts were reversed, with the heir receiving the $100,000 cash and the charity receiving the IRA, then the charity would receive the $100,000 and not have to pay taxes as a charity.  With this planning the entire $200,000 is transferred after taxes.

Sounds like an easy decision on which way to plan, right?  To make things a little more complicated, the heir could take the IRA payout over a period of time and IF the IRA is invested in appreciating stocks, then it is possible the stocks could appreciate tax deferred in the account over the payout time and distribute more money than the original $200,000.

This example ignores federal estate tax as our example is small enough to not incur federal estate tax, and it also ignores state estate taxes as there are none in my jurisdiction of Oklahoma.  You should always consult with an estate planner and tax adviser in your jurisdiction.

The moral of the story?  Spotting the issue allows for you to seek competent legal and tax advice tailored to your specific circumstance so you can make an informed decision on how you should structure your estate plan.

This article was written 1/16/2015, specifically for the Oklahoma jurisdiction. J. Todd Willhoite practices estate planning law in Claremore, Oklahoma.   A different result may occur in a different jurisdiction and the law does change, so it is important to seek competent legal and tax advice from professionals before acting on anything written in this article.

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