When it comes to estate planning, it’s not just about who gets what — it’s about how your assets are distributed. For example, if you have an IRA and a trust, think twice before naming the trust as your IRA beneficiary.
Why? Because whoever inherits the trust may have only five years to withdraw everything in your IRA account. By making the trust your IRA beneficiary, you may (unintentionally) gift your heirs a sizeable tax bill.
Strategic beneficiary designations allow you to minimize taxes and maximize your legacy. Here’s what you need to know:
Retirement accounts, investment accounts and life insurance policies allow you to name beneficiaries. When an account has a designated beneficiary, it bypasses probate, making the asset transfer smooth and easy.
As mentioned above, it’s generally not a good idea to name a trust as a beneficiary. But you can designate a nonprofit. If charitable giving is part of your estate plan, making charitable donations from an IRA can benefit both your favorite nonprofit(s) and your heirs.
First, let’s cover some quick background about:
IRAs, SIMPLE IRA, and SEP IRAs are tax-deferred. In other words, you don’t pay tax on the money in your account until you take it out. Withdrawals are taxed as income and the amount of tax paid on withdrawals depends on the individual’s tax bracket.
Consider these three scenarios:
Assets like real estate and taxable brokerage accounts generally receive a "step-up" in cost basis upon death. This means that your heirs inherit the asset at its current market value, eliminating any capital gains tax on past appreciation. If you plan to leave highly appreciated stock or real estate, passing assets to heirs (instead of a charity) can be the more tax-efficient choice.
Circling back to where we started — if charitable giving is part of your legacy, it’s important to structure your estate plan so both your loved ones and the philanthropic causes you care about receive the maximum value. By carefully selecting beneficiaries for each type of asset, you can minimize taxes, simplify the transfer process and make the largest possible positive impact.
A well-thought-out estate plan can provide peace of mind and lasting benefits for your heirs and causes you care about. If you have questions about how to optimize your beneficiary designations, we’re happy to help.
Let’s work together to maximize your legacy. Contact an experienced and friendly financial planner online or give us a call at (415) 541-7774. We look forward to working with you.
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