Lesson Five: Leaving Your Mark on Tomorrow
Touch the Future With Your Estate Plan
Martha sat in her attorney’s office describing her plans for the distribution of her estate.
“Well, let’s see now. I want to leave the crystal to my sister, Harriet. I should do something for my brother, Charles, although he’s so successful he really doesn’t need an inheritance from me. I’ll just leave him a token of my affection – perhaps the grandfather clock from my husband’s estate.
“I want to provide generously for my son, Tim, and my daughter, Julie,” Martha continued, “but I’m not sure it’s necessary, or even a good idea, to leave them all of my estate. We taught them to work hard and be self-reliant and nothing should change that.
“Now there are three others I need to tell you about . . . and they are very unusual,” she added slyly. On hearing those words her attorney leaned closer and Martha went on:
“Oh, yes. These people tell me they never have to pay income taxes. Not only that, I never have to pay gift taxes or estate taxes on anything I give to them. But here’s what is even more interesting: Whenever I make gifts to them, I get to write it off on my income taxes!”
Martha smiled at her attorney’s puzzled expression and finally confided that these “people” were actually several worthwhile not-for-profit organizations.
A Matter of Philosophy
Increasingly, people like Martha are telling their advisers: “My children are grown, educated and on their own. I have given them a good start in life. I want to provide for them after my death but I don’t feel I need to leave my children everything.
“I would do them no favors by giving them an instant fortune. I’ve worked hard; I’ve been successful; life’s been good to me. Now I want to give something back. I want to do something for humanity. It’s a matter of my personal philosophy.”
For these individuals, their charitable beneficiaries – school, house of worship, health institution, social service organization, cultural foundation or others – may be every bit as important as the “natural” objects of their bounty. And if that’s the case, then some remarkable estate planning ideas are possible. This final lesson in the Estate Planning Study Course explores ways by which you can add immense personal satisfaction to your plans – plans that make the statement: “I was here, my life was important . . . I made a difference.”
Erasing a “Tax Curse”
Certain kinds of assets carry around a “tax curse.” Whoever receives such property from an estate may have to pay income taxes on their inheritance (in addition to any “death taxes” due). Examples of tax-burdened property include U.S. savings bonds, deferred compensation and death benefits from retirement savings plans (including IRAs), accounts receivable of a business owner and installment sale contracts with payments remaining.
Choosing tax-burdened property to leave to qualified organizations means no one has to pay income taxes, and estate taxes are avoided as well. It’s even possible to leave property to charity and reserve lifetime income to a family member from the gift property. Such an arrangement also can save federal estate taxes, potentially leaving your heirs better off because you provided for a worthwhile cause.
Worst-Case Scenario: Your IRA
Suppose you were reviewing your investments and came across a file stamped: “60% Tax Due after Death.” Impossible? Not if the investment is your IRA or other retirement account. A combination of estate taxes and income taxes can nearly confiscate the retirement savings accounts of many people at death, leaving little remaining for heirs.
• Federal Estate Tax. The full, date-of-death value of retirement savings is subject to federal estate tax at a rate of 40%.
• State/Federal Income Taxes. Both federal income tax and state income tax (depending on the place of residence of your heirs) will be due on death benefits from an IRA or other plan – costing as much as 40% or more.
Federal estate taxes can be postponed when retirement assets are rolled over by a beneficiary. But an expensive visit from the tax collector – costing up to 60% or more – may lie ahead, when retirement savings are distributed and the foregoing taxes come due. A more satisfying option might be to leave the retirement account to support our programs and preserve all of the funds free from tax.