Give Assets Strategically for the Most Benefit

SailboatMost people pass significant portions of their estates to family members, but they also leave legacies to charities that they consider important to their communities. Does it make a difference which assets they give to family and which they give to charity? From a tax standpoint, absolutely.

A person who wants to divide estate assets among heirs and charities is usually better advised to give appreciated stock and real estate to heirs and make charities the beneficiaries of all or a portion of their retirement funds. The heirs would get a stepped-up basis in the stock and real estate and thus be taxed only on post-death gain, but every dollar they received from retirement accounts would be subject to income tax unless the distribution was derived from a Roth IRA. Depending on the size of the estate, retirement funds, like other estate assets, may be subject to estate tax as well. However, distributions from retirement accounts to charity would be subject to neither income nor estate tax.

A gift of retirement assets has other advantages in addition to tax savings:

  • It is easy to arrange. Simply request a beneficiary designation form from your plan administrator.
  • You can designate a charity as beneficiary of whatever portion you choose. For example, 10% or 25% of the account. If you have otherwise provided for heirs, you could leave the entire balance to charity.
  • The gift is revocable. You retain full control of your retirement funds should you need them, and you can change beneficiaries at any time.

There are two other assets that you might want to consider leaving to charity for similar tax reasons. They are savings bonds and commercial deferred variable annuities. The accrued interest in Series EE savings bonds is not taxed during life unless the bonds are cashed, but that interest will be taxed at the owner’s death. The tax can be avoided if the owner specifically directs in a will that the bonds be given to a charity, such as our institution.

Many individuals purchase deferred variable annuities to avoid current taxation of income on the investment. If you cash in a variable annuity, you will be taxed on the gain and the insurance company may also assess an early-withdrawal fee. You could elect to receive a life annuity, in which case a portion of the payments would be taxable. You may not need the income, so you simply retain ownership of the variable annuity until the end of life and then name a family member or friend as beneficiary. If you do this, all of the accrued gain in the variable annuity will be taxed. You may avoid that tax by naming a charity such as our institution as beneficiary. The only action required is obtaining a change-of-beneficiary form from the insurance company and naming us as beneficiary.

All of these examples demonstrate that from a tax standpoint it is better to leave our institution assets that would otherwise be subject to income tax and to give heirs other assets. If you do not have enough of these kinds of assets to meet your charitable objectives, then you may make up the difference with cash, securities, or real estate.

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