When I first spoke with Tom, his will directed that 10 percent of his $400,000 probate estate would go to his church and missions as a bequest. The balance was to go to his children equally. In addition to the assets distributed under his will, Tom had an Individual Retirement Account (IRA) valued at $100,000 under which he had named his spouse as primary beneficiary and his children as secondary beneficiaries.
His current plan gave me opportunity to discuss with him that, when it comes to estate planning and dividing assets between family and charity, there are good assets and bad assets for each recipient. The bad asset in Tom’s case was the IRA going to family. I say “bad” because when the children receive it, they will have to pay income taxes. Also, Tom did not realize that his desire to give 10 percent of his entire estate to charity would not happen since the IRA passed outside the will.
I suggested that he could accomplish his objectives better by making charity the secondary beneficiary of the IRA (after his wife). Since charities are not subject to income taxes, 100 percent of what the church received under the IRA would go to kingdom work. Secondly, he could change his will to reflect an amount going to charity that would equal 10 percent of the total estate value including the IRA.
For example, under Tom’s current plan, his church would receive 10 percent of the $400,000 or $40,000 and nothing from the IRA. The children would receive $360,000 under the will and $65,000 under the IRA (after they paid 35 percent or $35,000 in income taxes). Thus, the children would receive a total of $425,000 ($360,000 + $65,000).
Under the new plan Tom would designate that 10 percent of his whole estate, including the IRA, would go to charity. He left his wife as primary beneficiary of the IRA and named his children as 50 percent secondary beneficiary and his local church as a 50 percent secondary beneficiary. The bottom line was that the children would receive about $432,500 and charity would receive the full 10 percent or $50,000 (there was still some income tax due on the portion of the IRA going to the children). The children got more and charity got more. Tom liked that.
These simple revisions accomplish two things: They reduce taxes and maximize what goes to the children and to the Lord’s work. It amounts to thinking and planning wisely and carefully, based on what you want to do and whether you distribute good assets and bad assets to the right beneficiaries.
I would be happy to help you think through ways to maximize the benefits to those you care about. Give me a call (503-405-1594) or email me at jerryopp@aol.com. We’ll see if there is a way to maximize your distributions.
