Okay, next one, Who Gets What? Alright, most attorneys, including us in the old days―I didn’t think of this 25 years ago, I thought of it more recently―just kind of said, “Well, even with the Cascading Beneficiary Plan which was spouse/kids/grandkids―but maybe even without using disclaimers―it might make sense to think about which beneficiary is going to get which asset.
Who Gets What Strategy – Leave IRAs or Retirement Plans to Charity
Okay? And I’m going to contend that Who Gets What is very important. So, let’s say that you think of your estate as a pie. Alright? And at your death, we’re going to cut up the pie (or even at the second death, we’re going to cut up the pie).
Well, who’s going to get some of the pie? We’re going to have the surviving spouse get some of the pie, we’re going to have the kids get some of the pie, maybe grandkids get some of the pie, charity might get some of the pie, and Uncle Sam is going to get some of the pie. Can we all assume that if these are the main ones, wouldn’t it be nice if we cut out Uncle Sam, or at least we cut Uncle Sam’s piece to a tiny sliver so everybody else can get more? Does that sound like fun?
Okay, so we’re just going to cover two strategies of Who Gets What, but by the way, it’s a broad concept. Alright, we are going to cover IRAs to charity, and we’re going to cover children who are not equally strong financially.
So first, let’s say that you’re going to leave some money to charity. Alright and by the way, I actually blew this myself in my own document. I had $100,000 going to charity of my choice, and I had it in my will, okay? Does that seem reasonable?
You are going to leave $100,000 to a charity from your will, and your will reads, “I leave everything to my spouse except I’m going to leave this $100,000 to the XYZ charity.” Well, that seems like a reasonable thing, right? And if you’re married, people tend to be more generous at the second death. That is, the money goes to charity after you are both gone.
Well, think about this. You’re leaving $100,000 that you already paid taxes on to a charity that is tax exempt. What if instead, you left $100,000 to charity from your IRA or your 403(b) that you haven’t yet paid taxes on? You leave your IRA or 403(b) to charity.
If you leave your IRA or your 403(b) to your heirs, and let’s say that they pay 24% tax, you’re really only leaving them $76,000.
But if you switch Who Gets What, and you leave the IRA to the charity, and you leave the after-tax dollars to your heirs, you just saved $24,000 in taxes by just changing one little provision.
Hardly any estate attorneys get this right. And I’ll be honest, including us. You know, for many years, we didn’t do this. So now, I want to just switch Who Gets What.
The Roth and the after-tax dollars go to heirs, and the IRA and the retirement plan dollars go to charity (assuming you’re leaving some money to charity). Okay, and again I’m going to oversimplify this because of time, but it is because the charity does not have to pay tax and your heirs do.
Who Gets What Strategy – Children Who Are In Different Tax Brackets
Okay, what if you have two kids―and let’s say you still want to keep it equal―even if the kids aren’t doing equally well financially. One child is in a very high tax bracket (let’s say the 32% bracket) and your other child is in a very low tax bracket (let’s say the 12% bracket). We’ll leave the Roth IRA to the kid in the high tax bracket, and we’ll leave the traditional IRA to the kid in the low tax bracket, and then have some method of equalization. Well, we just saved 20% in taxes.
Hardly anyone does that. Now, if your kids are more or less equal financially, I don’t want to complicate life just for that, but a lot of times they are not.
I don’t think I’ve ever seen anybody do that except for us. So, this is another way of using our Who Gets What strategy.