Some Georgia residents might want to leave a portion of their estate to a charity. However, it is important to do this in a way that accounts for taxes to ensure that loved ones get the maximum benefit from assets.
As an example, a person might have a home, an IRA and an after-tax savings account that are each worth $1 million. That person might leave children all of the assets except for $100,000 from the after-tax account, which goes to a charity. The problem with this scenario is that distributions from the IRA will be taxed, so the children will get less money from these distributions than from the after-tax account.
Charities, on the other hand, do not pay taxes if they are named as beneficiary on an IRA from a donor. Therefore, a better arrangement would be for the charitable donation to come from the IRA. While the savings account and the home are passed using a will or a trust, an IRA is passed using a beneficiary designation. It is important that the person who is creating the estate plan makes the beneficiary designation consistent with the will or trust. While a Roth IRA or a Roth 401(k) would also be passed using a beneficiary designation, these are not taxed and could go to family members.
Estate plans need to be updated regularly. In particular, they should be reviewed when there are changes such as marriages, divorces, deaths and births. One danger with beneficiary designations is that they are sometimes overlooked even as a person makes updates to other elements of the estate plan. The danger here is that the beneficiary designation overrides instructions in a trust or will, so a person who fails to update it could end up leaving assets to an ex-spouse or some other unintended recipient.