What’s the Best Way to Leave Money to a Charity?
I’m David Witter, founder and CEO of Financial Harvest Wealth Advisors located in Winter Park, Florida.
I’m going to talk about something people ask frequently which is, “Hey, when I pass, I want to leave money to charity. What’s the best way to leave money to a charity?”
Our experience when we meet with people that have that intention, oftentimes for whatever reason, they do it in a way that isn’t the best in terms of tax savings. So let me explain what may be a better option.
Common Approach is leaving 80-20 in a Will
A common approach to leaving money to charity is you say, “Okay, in my will, I want to leave 80% to my loved ones. And then I want to leave 20% to a charity.”
Step-Up in Cost Basis
The problem is that the assets that go through your will — maybe your home equity, maybe a rental property, maybe some investments that you have — those normally get a step-up in cost basis, which means when they would go to a loved one, there wouldn’t be much of any tax impact to your loved ones.
Leave Funds from a Pre-Tax Retirement Account
Maybe a better way of giving to a charity instead of doing it through your will is to get it from a pretax retirement account. So going back to that same example, let’s say that you also have an IRA that’s in your overall net worth.
Well, maybe in the will you leave all that to your loved ones because it’s going to have very little tax impact.
Leave Money to a Charity from an IRA
And then, maybe some of the IRA, the pre-tax dollars, you can leave that from the IRA straight to the charity in which case charities don’t pay tax on that money that comes out from the IRA.
IRA More Tax Efficient
So as you can see, that’s a much more tax-efficient way of giving to charities, because if you just gave the entire IRA to your loved ones, they’re going to have to pay income tax on that money when they take it out of the account.
Give in a Tax-Strategic Way
So if you have that intent, which is terrific, make sure that you’re doing it in a very tax-strategic way and think about leaving those pre-tax dollars to charities in Roth accounts, and those other investments that get step-up in basis, leaving that to loved ones.
I’m David Witter, founder and CEO of Financial Harvest Wealth Advisors.