The most tax-efficient ways to give to charity at death
For many families, charitable giving is about more than generosity — it’s about legacy. The good news is that, with proper planning, you can support the causes you care about, reduce the tax burden on your heirs and maximize the after-tax value of your estate.
Too often, charitable gifts are made without considering how different assets are taxed at death. The result? Less going to charity and your heirs with more going to taxes. A thoughtful strategy can make a significant difference. One of the key principles of estate planning is asset location — deciding which assets go to which beneficiary. Often, someone will decide on their beneficiaries and make them the same share across all their assets.
It is important to note that qualified charities do not pay income tax or inheritance tax. So, if you plan on splitting your inheritance between charities and heirs, make sure the heirs are inheriting the most tax efficient assets.
Qualified retirement assets (IRAs, 401(k)s, etc.) are often the most tax-efficient assets to leave to charity relative to heirs. Heirs would typically owe ordinary income tax on withdrawals from those accounts, but charities will pay no income tax. Naming a charity as beneficiary allows 100% of the assets to go to the cause you care about.
Roth retirement assets (Roth IRAs, Roth 401(k)s, etc.) are better to be left to heirs as distributions are generally income-tax-free. Beneficiaries can also stretch the withdrawals over time, within certain rules. This can create years of tax efficient income for your children or grandchildren. Giving Roth assets to a charity may be generous, but it isn’t the most efficient use of them.
Nonqualified taxable accounts typically can be left to heirs with “stepped-up cost basis” meaning — the heirs would not pay any associated capital gains that the decedent accrued. However, they may still be subject to inheritance tax.
Life insurance can be an excellent estate planning tool and benefit to your heirs as there is no income tax or inheritance tax associated with life insurance proceeds. While it can also be a generous gift to charity, heirs also can inherit this tax free.
This type of estate distribution involves strategic planning, but if you are planning on leaving any significant assets to charity, make sure you are doing it in the most tax-efficient manner so that Uncle Sam gets a smaller portion and you maximize the after-tax value of your estate.
Randall & Associates Wealth Management Inc. is a registered investment adviser and does not provide any legal, accounting or tax advice. You should seek the counsel of a qualified accountant and/or attorney when necessary.
The opinions expressed here reflect the judgment of the author as of the date of the article and are subject to change without notice. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
