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Taxation may not leave inheritances as equal as you think

On Behalf of | Apr 15, 2021 | Estate Planning |

Creating an estate plan means looking at the minute details of one’s life and assets. You may think that you have an idea of how you want to distribute your assets after your passing. Still, the more you learn about bequests, inheritances, taxation and other important matters associated with asset distribution, the more you may doubt your original plan.

Estate planning is a fluid journey, and it is always possible to change your mind about what you want and what you believe is best. As you become more knowledgeable about what happens to your estate after your passing, you may find that making the obvious choice is not the best route for you or your family.

Is equal really equal?

You may think that, because you have multiple children, the best option would be to divide everything as evenly as possible. However, not all assets — even though made up mostly of cash — receive the same treatment. For example, you may believe that leaving $50,000 from your bank account to one child and $50,000 from your traditional IRA to another child would be an equal distribution. However, the IRS does not tax cash inheritances the same way as traditional IRA funds.

As a result, the child getting the bank account funds, which are tax exempt as a cash inheritance, would end up with more in the long run than the child getting the IRA funds, which the IRS would tax as regular income. However, it is also important to note that even IRAs can differ. If you have a Roth IRA and a traditional IRA, the child inheriting the Roth funds would not face the same taxation as the child inheriting the traditional IRA funds.

Where would it do the most good?

Additionally, you may want to remember that you do not have to leave your assets to your heirs or only to your heirs. If you have charitable causes that you feel strongly about, you may consider putting your remaining assets where they would do the most good. For you, that could mean leaving a portion or even all of your remaining assets to charity.

When considering the difference between leaving charitable organization funds from a bank account or traditional IRA, the taxation issue is not as significant because charities receive tax exemptions. Of course, no matter how you want to divide your assets, understanding the tax implications and knowing that you have more estate planning options than you think could help you create a plan that you feel makes the most of your legacy.