Let’s imagine a man who wanted to save time and money but still be generous and let’s call him John Doe. John had a 401(k) and non-qualified savings and investment accounts he had built up by being a good and wise steward during his working years. The 401(k) rolled over into an IRA upon his retirement. His IRA was valued at about $200,000. His non-qualified savings and investment accounts were also valued at about $200,000.
Being a generous man, John wanted to leave $200,000 to his church upon his death. He also wanted his two children to receive a reasonable amount but not so much that they might lose their work ethic.
John was careful and frugal while he worked and nothing changed in his retirement. He saved a thousand dollars and did his will by himself online. His will was written simply and said exactly what he wanted, $200,000 to his church from his bank accounts, the sale of his car and the rest of the $200,000 from a non-qualified investment account. The IRA was to go equally to his two children.
That was reasonable and simple. There was no need to pay some expensive estate planning attorney, was there?
Unfortunately, John passed away before he discovered that being frugal isn’t always being wise. The problem is that his “estate plan” was too simple and wasn’t a plan at all. That “plan” was unwise, did not consider taxes, and reduced substantially the money John’s children inherited. Here’s why.
John’s church got the first $200,000, mostly out of his banking accounts, his car, and a few investments. These were low or no appreciation assets and accounts. His children got the rest, including a large tax bill for the IRA because of the deferral of income and the appreciation of the investments within the IRA. Rather than have a do-it-yourself “plan,” John should have funded his bequest to his church with his IRA. That would have reduced the tax due to the IRS because the church would not have had the same tax bill as the children.
The result of John’s “plan” was higher taxes and a reduction in what his children would receive probably by $10,000 each, perhaps more, depending upon the tax brackets of the children and the amount of appreciation of the IRA.
One of the easiest and best bequests to make to a church or charity, whether before or after death, is a highly appreciated asset, including retirement accounts like 401(k)s, 403(b)s, and traditional IRAs, investment accounts that have held stock for a while during a rising market, and real estate that has been held for a long time. These gifts to a charity cost the donor nothing and the IRS comes up with far less than if the bequests or gifts were to a person.
There can be hidden taxable income in a number of different assets, including life insurance, CDs, Savings Bonds, nonqualified stock options, and deferred payments of capital gains, among others, under our complex tax laws.
In most cases, naming Idlewild Baptist Church as the beneficiary of these types of assets, especially when they are highly appreciated and contain deferred income, gives the estate and heirs the best tax benefits, avoiding both income and estate taxes.
Life insurance also can be an excellent gift, too. Naming the church as a primary or contingent beneficiary of an existing or new life insurance policy can result in a federal estate tax deduction for the full amount of the proceeds payable to the church regardless of policy size.
This is good general advice, but you need to be aware that every person’s situation is unique and that your particular circumstances and investment and retirement investments might change the recommendation for the best results. Seek the advice of a qualified tax or financial adviser before finalizing your paperwork.
For more information and detail, call us at (813) 264-8713. We may not be able to answer your question but we can refer you to a qualified Christian adviser who can.
About the Author
John Campbell has retired from a 40-year legal practice as a trial attorney in Tampa. He has served in multiple volunteer roles at Idlewild Baptist Church in Lutz, Florida, where he met Jesus. He began serving as the Executive Director of the Idlewild Foundation in 2016. He has been married to the love of his life, Mona Puckett Campbell, since 1972.