Where will your money and material possessions go after you’re gone? Most people leave nearly everything to their spouse, and if no longer alive to their children. But some want a portion of their estate to go to charities that support the causes and values that are important to them. How can you do this?
The financial part of a legacy has complicated rules. Your money passes to your surviving beneficiaries through a combination of beneficiary designations on insurance and retirement plans, your will or trust, and the intestate (succession) laws of your state of residence upon your death if you have no will.
Planning can get particularly challenging if your assets themselves are complicated (a business, real estate), if your beneficiaries’ health is complicated (care for a dependent, drug dependency), or if your family situation is complicated (multiple marriages, very different situations for the different beneficiaries.) When you add in wanting to minimize taxes and having preferences as to when money is to be released to different beneficiaries, you can see that there is both an art and science in figuring this all out.
It’s frequently critical to work with a variety of professionals in your estate planning. Your estate planning attorney can put together a plan and then construct the appropriate legal documents. Many financial planners are familiar with a variety of planning approaches and can help with the process. They will need to compile your list of assets to give to the attorney. Insurance agents sometimes get involved because life insurance might be an approach you decide to use. In my experience it’s important to work with very high caliber professionals in each of the appropriate areas.
Until a couple of years ago I was a financial planner. Here is an estate planning strategy that I frequently recommended to my clients. Let’s assume that there is some cause (charity) that is important to you. While you’re alive, you make annual contributions to support their efforts. Those contributions will stop upon your death. You want them to also inherit some of your assets.
Let’s assume your estate totals $500,000 including a $100,000 retirement plan and you have two children whom you want to inherit equally. Each child would then receive $250,000 including half the retirement plan ($50,000 each.) If your children would be in the 20% marginal tax bracket when they inherit, they would each owe 20% of the $50,000 or $10,000 in income taxes. Their net after-tax inheritance would be $240,000.
What if you changed only the beneficiary of your retirement plan to your favorite charity? Then the charity would receive all $100,000 free and clear. It wouldn’t have to pay any income tax on it (it’s a nonprofit.) This is an efficient way to leave a legacy to your favorite cause. You could set it up so that the charity received and used the lump sum all at once, or you could leave the money to their foundation to stretch out the time period for its use.
Here’s the critical question – how would leaving some money to charity affect your children? If each child received $200,000 instead of $240,000, would it make a critical difference in their lives? If not, where would you like your $100,000 to go to make the world a better place? In any case, review your situation and goals with your professional advisors to find strategies that are appropriate for you.
What would you like your legacy to be? Are your estate planning documents and retirement plan beneficiaries set up to do what you want them to do?