Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question:  My client wants to leave $100,000 to charity at death.  What’s the best asset for the client to use?

Answer:  For most clients, it’s best to leave qualified assets—such as IRAs or Section 401K plans—to charity.

Here’s why.  Say that Fred has an IRA worth $200,000, and cash in a bank account also worth $200,000.  If Fred leaves the rest of the bank account money to his daughter Irene, she’ll receive the $100,000 income tax free.  Irene, if she is also the beneficiary of the IRA, will have to pay income tax on that money as she withdraws it from the account.  If Irene is in a 35% income tax bracket, that means she’ll pay $70,000 in income taxes to liquidate the IRA.  Her total inheritance, after taxes, would be $230,000.

On the other hand, say that Fred names the charity 50% beneficiary of the IRA, with Irene the other beneficiary.  Irene will pay $35,000 in taxes on her half of the IRA, netting $65,000.  She will also inherit the entire bank account tax free.  Irene’s net inheritance will be $265,000–$35,000 more than under Fred’s first plan.

What about the charity?  The charitable organization doesn’t care if the money it gets is from a qualified plan or IRA, or whether it’s from an after-tax asset like a bank account.  The charity doesn’t pay income taxes on the amounts that it gets—so it keeps the $100,000 earmarked for it either way.

By being a little smarter about choosing which asset to leave to charity, Fred will help Irene get to keep more money.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.