An IRA is one of the worst assets to leave to your children. Depending on the size of your estate, as much as 65% can go to taxes with improper planning. This video illustrates one solution to leave your IRA to your kids with no taxation and provides a benefit for your church's captital campaign or endowment fund to boot.
This short video is great example of a fact that most people are completely unaware of problems that exist in their estate plan. Specifically, I’m going to talk about IRA’s. If you’re an individual with an IRA, I’m going to show you how to leave your entire IRA balance to your children instead of sharing part of it with a tax man. If you’re a church leader, this information can help you build your endowment fund so that eventually you’re operating your ministries from the earnings on the investments on the endowment fund instead of counting primarily on pledges. Most people who are retired probably have an IRA because when they retired they rolled their 401k plan into an IRA. Now what they’ll do is they’ll continue to draw income form the IRA during retirement and when they die they’ll typically leave the IRA to their spouse who continue t draw income and then leave the IRA balance to the children with their debt. Now, let me tell you about Bill and Anne. Bill owned a trucking company and was pillar of the community. Few years ago, he sold his dealership and retired. His wife Anne thought school for 35 years. Bill and Anne lived in a home that’s increased value over the years and have a number of investments and Bill also has an IRA that’s worth a million dollars. Now what Bill has done, he has named Anne the beneficiary of the IRA. If he dies first, Anne will simply rename the IRA in her name, change the beneficiary to the children and continue to draw income for the rest of her life. And this is a typical plan\ but it’s a tx disaster and IRA is one of the worst assets to leave to children because there’s two potential problems. First, the IRA maybe exposed to a estate taxes which start at 45%. Bill and Anne are in that bracket, so right after that, about half of the IRA goes to taxes. Second, an IRA is subject to ordinary income taxes in the year the IRA is inherited. So in addition to having to pay tax on the IRA proceeds this likely will bump the children’s income tax brackets up and result in higher taxes on their salaries. Now here’s what Bill and Anne’s current plan looks like just with respect to Bill’s IRA. Out of a million dollars that children are ultimately going to receive $357,500.00, only about 35%. The rest is going to get $642,500.00 and Bill and Anne’s church is going to get zero. Here’s the result when Bill learns how to solve this tax problem. The children are going to get the full million, the IRS is going to get zero and Bill and Anne’s church is going to get a million. This one planning technique is especially important because the treasury department estimates that they are currently $3 trillion in IRA’s and close behind are 60 million baby boomers. The oldest is turning 63 this year with $12 trillion in retirement plans that will likely be rolled into IRA’s. This is Bob Cavanaugh with the Smart Giver.