People in Pennsylvania who are creating an estate plan might want to donate a portion of the estate to charity. However, it is important that they do so in a way that is tax advantageous. Failing to do so is a common mistake.
As an example, a person might have three major assets worth a total of $3 million. If the home, the IRA and the after-tax savings account are all worth the same amount, the person might leave the first two to the children along with $900,000 of the after-tax savings account. The remainder might go to the charity.
Unfortunately, the children will pay taxes on IRA distributions, so they will not get as much money from this account than if they got the whole of the after-tax savings. The charity will not be taxed on the IRA. Therefore, a better plan would be to leave the entire after-tax savings to the children along with $900,000 of the IRA.
People should be aware that distributions from Roth IRAs and Roth 401(k)s are not taxed on distribution, so this would not be necessary with those plans. It is also important to keep in mind that a beneficiary designation is used to pass an IRA, so this document should be consistent with the will, the trust and any other elements of the estate plan.
Failing to keep estate planning documents updated or consistent is another one of the major mistakes many people make with estate plans. A person might remarry and forget to remove an ex-spouse from a beneficiary designation, or the person might have more children in the new marriage and fail to add them to the will or trust. In addition to reviewing and updating the plan regularly, people may also want to talk to family members about what is in the estate plan.
