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The Importance of Obtaining Multiple Planning Perspectives

The Importance of Obtaining Multiple Planning Perspectives

I am blessed in my role as the Legacy Giving Advisor at EWTN to discuss a wide range of planning topics with our EWTN Family Members. My discussions usually center around planning for the individual, their family, and their favorite charitable causes. My hope is that I can share the knowledge, ideas, and solutions I've gained from over...20 years of experience that will have a positive impact in your life and legacy.

During a recent call I had with John and Mary from Colorado, they let me know that they had converted their traditional IRAs to Roth IRAs. They only realized afterwards that they, not their children, would be responsible for the tax from the conversion. Unfortunately, their advisor had suggested this estate planning technique without offering a solution to offset the tax liability. John remarked to me, "Why should we have to take the tax hit and not the kids, as they are the ones who will be receiving the inheritance?

"Since every situation is different and because I did not know their current financial situation, their tax bracket, or if their estate would be subject to the Federal Estate Tax (today most aren't), I offered John and Mary a few general points and said that I would be happy to speak with them in more detail if they had any additional questions. It is also important for you to consult with your Financial Advisor or tax preparer before you finalize any type of current or future charitable gift.

In general, traditional IRAs (Individual Retirement Accounts), but not Roth IRAs, may pose some challenges when designating all or a portion of one's account to heirs. From a tax planning perspective, it is not the most "tax friendly" asset to leave to your children.

For example, if you have a variety of assets, it is often best to leave any IRD (Income in Respect of a Decedent) assets, such as IRAs and pension plans, to charity. This removes the "bad" assets from the donor's estate.

Any appreciated assets, such as a home, brokerage accounts, or CDs, can be left to the children as these tend to be more "tax friendly" assets. In regard to leaving gifts directly to grandchildren, you will need to study the state laws where the grandchildren reside regarding the "age of majority" (age when a child can inherit an asset, typically 18) and also with respect to any GST (Generation Skipping Tax) due on the transfer.

Generally, appreciated assets receive a step-up in basis when transferred at death. For example, if a parent leaves a home purchased for $100,000 to a child and the home has a fair market value of $1,000,000 at the parent's death, the child assumes a basis in the home of $1,000,000. In contrast, IRD assets do not receive a step-up in basis. See Sec. 1014(c). Therefore, when a child receives an IRA account from a parent, all payouts will be taxed as ordinary income to the child.

It is also important to note that a traditional IRA may be the single largest asset a person owns. For instance, in 2018, the total traditional assets of IRAs in the United States were approximately 7.39 trillion U.S. dollars. With the exponential growth in traditional IRAs assets over the last few decades it is important to clearly understand the rules that govern IRAs and other retirement plans (IRAs, 401ks, 403(b)s, Thrift Savings Plans, etc.). Also, if you have charitable intent and would like to make an outright or deferred gift using your retirement assets, it is important to inform your financial advisor about your intentions. If John and Mary had informed or if their advisor had asked [about their charitable intent], they might have arrived at a different solution on other ways to pass on this asset and/or other assets to their children. One way which a number of EWTN Family Members have already done so, would have been to designate a percentage of John's IRA to charity, thus reducing the income tax the children would have to pay on the asset. A number of EWTN Family Members have already done this. The percentage of the traditional IRA that was designated to EWTN would be transferred at death, free of any income tax. Another way to have converted John's IRA and offset the tax hit would have been to establish a life-income gift.

As I have mentioned in previous articles, planning takes time and attention to detail. It is my hope that our EWTN Family Members have the best planning experience possible and this involves understanding all that goes into passing on of assets to heirs and/or charity.


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This site is informational and educational in nature. It is not offering professional tax, legal, or accounting advice. For specific advice about the effect of any planning concept on your tax or financial situation or with your estate, please consult a qualified professional advisor.