What’s the Best Asset to Leave to Charity?

When I sit across the table from a widow who’s charitable, I usually know what she’s going to say before she says it. She tells me to divide up her assets evenly (primarily IRAs): She wants to leave one-third to her favorite charity, one-third to her son, and one-third to her daughter.

What an honorable split of her inheritance! She wants to help her kids—and she wants to donate to a charity she feels will make good use of her hard-earned money when she’s gone. But if no one gives her advice, she could be making a costly mistake. Don’t cost yourself more money by making the same mistake and leaving the wrong asset to charity.

How does this happen? If we aren’t careful, we accrue assets haphazardly and give them randomly too—which can lead to paying unnecessary taxes. One thing I’ve learned in my investment company is that you need a customized strategy to accrue assets in a tax-diversified way. Then I encourage you to work with a CPA, estate planning attorney, and financial professional to create a gifting strategy to give your assets away when the time is right. If not, you could face unnecessary double taxation. After all, you don’t want the beneficiary of your estate to be the IRS!

Here are some gifting strategies for different asset types:

Qualified Assets

Qualified assets refers to qualified money in retirement accounts like IRAs and 401(k)s. You haven’t paid taxes on these accounts because you pay the taxes when you withdraw the funds. In the example from earlier, my client wanted to give one-third of her IRA to charity. But your IRA is a qualified account which means you’ve never paid taxes on it.

If you leave your IRA to a charity, then the charity won’t pay any taxes because it’s a 501c3 organization. Who’s going to pay the taxes? Your heirs. It will ultimately come out of your estate.That’s why I don’t recommend the donation of any qualified assets to charity.

Roth IRA

Along these same lines, one of the last assets you’d want to leave to a charity is a Roth IRA. I’ve caught many beneficiary designation forms where the family outlined that their Roth IRA beneficiary was a charity. As good of a deed as this is, they weren’t helping themselves or their family members by donating tax-free dollars.

I strongly encourage you to avoid leaving a Roth IRA to charity. Instead, leave your Roth IRA to your children and living family members so they can have the benefit of receiving tax-free dollars as their inheritance. The Roth IRA will have to be removed over ten years, but the ten years will be a decade of tax remembrance.

Real Estate

An alternative gift that’s more tax efficient is real estate. You may not realize that one of the largest assets you own is your home—and rental property, if you have that. Real estate is also one of the best appreciating assets and provides a tax-efficient way to donate funds after you’ve passed.

In my office, we’ve found that most homes are sold at the client’s passing. So we recommend that clients give a portion of their home to charity alongside their beneficiaries. This is a great asset where you can designate 10-20% of the proceeds to charity without adding any financial burden to your other beneficiaries. How would you do this? It’s called a life estate agreement. It’s a type of legal joint property ownership in which the owner has the right to use the property for life, after which all or part of it passes to charity. If you’re considering this, make a meeting with your attorney to draft a life estate deed.

Appreciated Stock

If you’re looking for one of the best assets to gift to charity, look no further than your brokerage account(s) with stocks and bonds. These are taxable accounts, so gifting appreciated stock can be a great way to give yourself a tax deduction while you avoid paying capital gains taxes on your best performing equities.

Gifting stock to charity is as easy as opening your online brokerage account and transferring your stock to the non-profit you’ve chosen. Then you can look forward to the nice tax benefit when tax season comes around! See my blog How to Give Away Appreciated Stock to learn more.

Summary

A great way to obey the biblical mandate of generosity is to have a gift strategy for your assets. Leave a generous legacy by including your local church or favorite charity as a beneficiary to your estate.

Proverbs 11:4 says, “Riches do not profit in the day of wrath, but righteousness delivers from death.” Riches only give short term satisfaction, but righteous acts like generosity live on after you’re gone. C.S. Lewis said, “The only things we can keep are the things we freely give to God.” So leave a righteous and generous legacy. You won’t miss it when you’re gone!