How You Leave Your Money Matters: Don’t Let Taxes Eat Up Your Legacy

It can be easy to think dividing your assets for your kids and favorite charities is just about splitting things down the middle. But here’s a big lesson I’ve learned helping people with estate planning: What type of account you leave, and who you leave it to, can make a HUGE difference in what actually gets passed on.

 

Not All Accounts Work the Same

 

Here’s why you need to pay attention:

1. Traditional IRAs, 401(k)s, and Similar Taxable Retirement Accounts

- These are common retirement savings accounts.

- If your kids inherit them, they’ll pay regular income tax on whatever they take out.

- By law, they have to withdraw all the money within 10 years. 

- In states with high income tax, like California, taxes could take up to 54%!

- Example: If someone leaves a $3 million IRA and it grows to $9.3 million in 10 years, taxes could leave the kids with only $4.6 million.

2. Roth IRAs

- These are much better for your heirs.

- Withdrawals are completely tax-free.

- The money can keep growing, then all of it can be withdrawn in 10 years without any taxes.

- Using that same example, your kids could get the whole $9.3 million, tax-free.

3. Brokerage Accounts and Real Estate

- When you pass away, these get “stepped up” to current value, so your heirs owe little or no tax if they sell them right away.

 

Smart Moves for Giving to Both Family and Charity

 

If you want to split your assets between your kids and a charity, here’s the best approach:

 

- Leave IRAs and other tax-heavy accounts to charity. Since charities don’t pay taxes, the whole amount goes to a good cause.

- Leave Roth IRAs and brokerage accounts (like stocks or real estate) to your kids. They’ll get more because there’s little or no tax.

- If your kids want, they can donate some of what they inherit and get a tax deduction themselves.

For Even Larger Estates:  

 

Charitable Remainder Trusts (CRTs) are an advanced giving tool:

 

- They let your heirs get income now.

- Whatever is left later goes to charity.

- This can also lower your overall taxes.