Will, 401k and Beneficiaries

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Kywildcat
Posts: 87
Joined: Fri Jun 24, 2016 1:35 pm

Will, 401k and Beneficiaries

Post by Kywildcat »

I am 34yo (single) and am starting to think about a will for the first time. As background, my estate would probably be worth around $700k today with my current assets and life insurance through my employer.

At a high level, I have 3 siblings and 2 parents (married). I have my parents as beneficiaries on all my accounts with siblings as secondary. However, I would like about $70k be donated to various charities/schools. I believe the most tax efficient manner would be for theses donations to be made from my 401k, correct? Should I just add the charities as beneficiaries or should I be looking at something else ( trust, etc)?
Lee_WSP
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Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Will, 401k and Beneficiaries

Post by Lee_WSP »

Are you able to split your tod? If so, that'd be an easy way to do it.
mhalley
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Re: Will, 401k and Beneficiaries

Post by mhalley »

You could just give the money to the charity outright. Another option would be to set up a charitable remainder trust. I believe if you do it that way, the charity gets 10% when you die immediately, then the beneficiaries get a certain percent each year until they die, then the charity gates what’s left. The trust would cost money to setup, and there would be some ongoing expenses.
https://www.fidelitycharitable.org/guid ... rusts.html
bsteiner
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Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: Will, 401k and Beneficiaries

Post by bsteiner »

Kywildcat wrote: Fri Nov 20, 2020 10:16 pm I am 34yo (single) and am starting to think about a will for the first time. As background, my estate would probably be worth around $700k today with my current assets and life insurance through my employer.

At a high level, I have 3 siblings and 2 parents (married). I have my parents as beneficiaries on all my accounts with siblings as secondary. However, I would like about $70k be donated to various charities/schools. I believe the most tax efficient manner would be for theses donations to be made from my 401k, correct? Should I just add the charities as beneficiaries or should I be looking at something else ( trust, etc)?
You're correct that it's usually better to use traditional 401(k) or IRA benefits for the charity's share, since the charity won't have to pay income tax on it, and the noncharitable beneficiaries will get a basis step-up for your other assets.

However, since your siblings (assuming they're not more than 10 years older than you) can still get a life expectancy stretch, given their age, the benefit of the stretch over many years will probably outweigh their having to pay tax on the distributions. So, assuming they're in a position to take advantage of the stretch, and they don't mind the complexity (which isn't that great), you might want to leave your retirement benefits to your siblings.
mhalley wrote: Fri Nov 20, 2020 10:30 pm You could just give the money to the charity outright. Another option would be to set up a charitable remainder trust. I believe if you do it that way, the charity gets 10% when you die immediately, then the beneficiaries get a certain percent each year until they die, then the charity gates what’s left. The trust would cost money to setup, and there would be some ongoing expenses.
,.,
A charitable remainder trust (CRT) pays a percentage of the value of the trust each year to one or more individuals. After the individuals die, the balance goes to charity. The charity doesn't get anything at the beginning. The 10% rule means that the actuarial value of the charity's remainder interest has to be at least 10% of the initial value of the trust. Of course, depending on the investment performance, and how long the individuals live, the charity may get more or less than that.

The benefit of a CRT is that it's tax-exempt. So it can receive retirement benefits tax-free. Distributions from the CRT to the individuals are generally taxable. A CRT will often (though probably not in this case) be a good way to replicate the stretch for retirement benefits.

For more on CRTs as beneficiaries of retirement benefits, see my article on this in the April 2020 issue of Trusts & Estates: https://www.kkwc.com/wp-content/uploads ... 4_2020.pdf.

Someone who has a large deferred compensation benefit that payable in a lump sum at death might leave it to a CRT.

Or someone who wants to sell a highly appreciated asset and diversify might contribute it to a CRT for his/her own benefit (or for the benefit of himself/herself and his/her spouse), with remainder to charity. That will spread the capital gain out over a number of years. The benefit of deferring the capital gain may approximately offset the loss of the remainder interest to charity.
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FIREchief
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Re: Will, 401k and Beneficiaries

Post by FIREchief »

Kywildcat wrote: Fri Nov 20, 2020 10:16 pm I am 34yo (single) and am starting to think about a will for the first time. As background, my estate would probably be worth around $700k today with my current assets and life insurance through my employer.

At a high level, I have 3 siblings and 2 parents (married). I have my parents as beneficiaries on all my accounts with siblings as secondary. However, I would like about $70k be donated to various charities/schools. I believe the most tax efficient manner would be for theses donations to be made from my 401k, correct? Should I just add the charities as beneficiaries or should I be looking at something else ( trust, etc)?
This looks really simple. Just add the charity as a 401k beneficiary and reset the percentage every year or so to keep it in the neighborhood of $70k. You will also want to let your parents/siblings know so that they could let the charity know in the event or your unfortunate demise.

That said, I would recommend you establish a medical power of attorney and living will so that in the event you become incapacitated, or worse, your family can provide medical direction in accordance with your wishes. At risk of starting a debate, DIY software for this can be obtained for less than $100. You can also spit out a boilerplate will to be used in the event that you have any meaningful other assets, final expenses, etc. that you care about. If it's just a lease and some personal belongings, it may not matter much. Some states allow you to name a beneficiary for an automobile. See my signature. 8-)
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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