Anyone working with our office knows it is our challenge and goal to never go through the probate process. Ohio law has become very conducive to that end. Through the proper titling of assets, most property can be transferred to the next generation automatically at death. An automatic transfer is not always the best way for tax reasons.
Several years ago a lady asked to have her will reviewed. One of her greatest concerns was to insure that her church would receive a bequest at her death. In her will she gave One Hundred Thousand Dollars to her church. Her largest money asset was her Individual Retirement Account (IRA) naming her children as the beneficiaries. She was told that the charitable bequest needed to be in her will to insure that the bequest would take place. This plan would have cost her children the following:
- The full and complete probate of her estate at a cost of two to five per cent of the value of her assets and take three to fifteen months to complete.
- The IRA money would first be subject to three or maybe four taxes: Ohio Estate Tax, Federal Income Tax, Ohio Income Tax and maybe Federal Estate tax.
- The estate or children would have to first pay all of the above income taxes on the money before making the distribution to the church. All IRA money is taxed before distribution except if paid directly to a charity.
- Considerable paperwork would be necessary to transfer assets from the estate to the children and also paperwork to transfer the IRA to the children.
Charities are exempt from income tax. Any IRA monies that would pass directly from the IRA to the church would do so free from any Federal or State income tax. Under her old will and her IRA designation, the One Hundred Thousand Dollars would have passed to the children first. Her children are very successful and were in a thirty-five percent income tax bracket considering Federal and Ohio tax. It would have cost the children THIRTY FIVE THOUSAND DOLLARS to transfer the One Hundred Thousand Dollars to the church.
The solution was not complicated. We contacted the custodian of the IRA account and created separate account beneficiaries. First, we made the church a beneficiary for One Hundred Thousand Dollars. The charitable beneficiary received all of the money without having to pay any federal or state income tax. They also received this money immediately without going through a long drawn out probate process. We then separated the balance of the IRA account into three separate accounts for each of the children whose ages ranged from twenty-two to thirty-two. Each child was able to stretch withdrawal of their account funds over their life expectancy. The ten year difference in age created a tremendous increase in value for the youngest child. They in effect were able to stretch withdrawal of these funds over their sixty-plus life expectancy. Partial deferral of paying tax on this money can turn Twenty Thousand Dollars into Eighty Thousand Dollars.
Through the use of transfer on death, life estate and proper beneficiary designations we did not need to file a will and go through the probate process. Today, a new temporary law has allowed distribution direct to charity while you are alive without tax consequences. This will be the subject of another article.
The size of the account does not matter. If a person wants to benefit their church, school or other charitable cause with a donation of One Thousand Dollars, the use of a designated account within their IRA will accomplish that end. You cannot combine your children and the charity as joint beneficiaries without adverse consequences. Each designation must be separate. It is important to see in print your beneficiary designation to insure that the desired result is in place. You can have this distribution at your death or upon the death of your spouse if created correctly.
This article is a result of seeing how a proactive approach to estate planning saved time, money and inconvenience for the next generation. This individual did pass away and the stated course of action was completed within one month of her passing.
Jeff Roth is a partner with Forrest Bacon, David Bacon and associate Jessica Moon of the firm ROTH and BACON with offices in Port Clinton, Upper Sandusky, Marion, Ohio and Fort Myers, Florida. All members of the firm are licensed in the State of Florida. Mr. Roth’s practice is limited to wealth strategy planning and elder law in both states. Nothing in this article is intended for, nor should be relied upon as individual legal advice. The purpose of this article is to help educate the public on concepts of law as they pertain to estate and business planning. If you have any questions you would like to have answered in this area of law, please direct your question to this journal and your question will be considered for use as the topic of subsequent articles. Jeff Roth can be reached at [email protected] (telephone: 419-732-9994) copyright Jeffrey P. Roth 2011.
