Lesson Five: Leaving Your Mark on Tomorrow

Just Like One of the Family
When it comes to drafting an estate plan, family members are generally the first ones for whom provisions are made. Even state laws governing the distribution of estates of those who die without wills provide that family members receive varying shares of the estate. But, having an estate plan allows you to remember not only your immediate family members but also the larger groups of friends, loved ones and even organizations that you consider family.

The term “family” often refers to someone with whom we have a close bond. Many people consider the charities they support to be members of their family. They provide financial support, just as they do for children or grandchildren. They devote time and energy to support charitable goals and track the growth of the organizations the way they would watch their own children’s accomplishments.

Tax benefits are available for charitable bequests, but that’s not the motivating factor for people to include charitable bequests in their estate. People include gifts to charity in wills, living trusts and beneficiary designations because they see their bequests as a way to perpetuate gifts made during their lifetimes.

Many people are proud to share the news with their children that they are providing a legacy to charity as part of their estate plans. Children almost invariably understand that parents have a desire to leave the world a better place, and that their bequest to support favorite organizations is both a source of satisfaction and a message to children and grandchildren on the importance of philanthropy in the world.

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 Burden
Certain kinds of assets carry around a tax burden.  Whoever receives such property from an estate may have to pay income taxes on their inheritance (in addition to any estate 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 a lifetime stream of payments 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.

Your IRA and Taxes
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.

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