Consider this legacy giving strategy: Stock to the kids, IRA to charity

At the end of March, total retirement assets in the United States topped more than $35 trillion dollars, accounting for 30 percent of all household financial assets. IRAs topped the charts at $12.5 trillion–the most assets of any retirement category.

If you have a traditional IRA, you’re probably familiar with the basics:

An IRA can have multiple beneficiaries following your death, and you can designate a dollar amount or percentage of assets.
You can change your IRA beneficiaries as often as you like, and beneficiaries can differ across your multiple IRA accounts.
If a beneficiary dies before you do, and you don’t change the beneficiary designation, the assets will be proportionately reallocated to remaining beneficiaries when you die.

Here’s a critical additional point that is often overlooked: Designating your fund at the North Carolina Community Foundation as the beneficiary of all or a portion of your IRAs is extremely tax advantageous. If you intend to leave money to charity when you die, chances are that this technique is absolutely the best option if you own other assets, such as stock or real estate, to leave to your family members or other heirs.

Why is it so beneficial to leave your IRA to charity and other assets to your family? Three words: taxes, taxes and taxes.

First, IRAs are included in your estate for federal estate tax purposes when you die. The current exemptions are set at such high levels right now that they do not affect as many taxpayers as they used to, but for many families, estate taxes are still an issue. If you leave your IRA to charity, estate taxes do not apply to that balance.
Second, the bulk of the balance in an IRA (sometimes the entire amount) is counted as income when IRA withdrawals are taken by your estate or your heirs. If a charity receives your IRA, the charity will not pay these income taxes.

Third, highly-appreciated stock and other non-retirement assets you own outside of your qualified retirement plans when you die get a “step up” in basis, meaning that your beneficiaries who receive and then sell the assets won’t pay capital gains tax on the appreciation that occurred before you died. And inherited, non-retirement assets are not included in the beneficiary’s income for tax purposes.

The bottom line here is that if you are choosing between stock and an IRA to leave one to your children and the other to charity, leaving the IRA to charity and the stock to your children is a no-brainer.

Have questions? Reach out to the NCCF development team. We are happy to help!

This article is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice.