Using beneficiary designations for charitable donations

On Behalf of | Sep 13, 2018 | trusts

Some North Carolina residents who are creating an estate plan might want some of their assets to go to charity. However, people often use a will or a trust to pass those assets, and this can be a mistake.

The error is because of the types of assets that are passed using a will or trust versus a beneficiary designation. As an example, a person might have three main assets worth $1 million each: an IRA, a home and an after-tax savings account. The person might want to leave $100,000 of the estate to charity and the rest to the children. This could be accomplished by naming the children on the beneficiary designation for the IRA and leaving the home and $900,000 of the after-tax savings to the children and the remainder to the charity.

The problem is that the children will be taxed on the IRA distribution, but they would not be on the after-tax savings account. It would be better to leave the charity money from the IRA. The charity will not be taxed, and the children will get more tax-free income. It is important to note that children will not pay taxes on Roth IRAs or Roth 401(k)s, so this not would apply in those cases. Beneficiary designations should be consistent with the instructions in the trust or will.

The person may also want to discuss the uses of trusts with an attorney. These are versatile vehicles for estate planning that can also help save on taxes and support heirs with special needs. For example, a person may be concerned about how responsible a child will be with an inheritance. The trust could be set up to either allow a trustee to decide when distributions are made or to make distributions at certain times, such as when the beneficiary finishes college or marries.