How to Leave Money to Your Kids, Grandkids and Church Wisely

Your will doesn't control your IRA. Or your 401(k), your life insurance, or most of your annuity contracts. Those pass by the beneficiary form you filled out, possibly at a kitchen table in 1998, possibly naming an ex-spouse or a brother who's been gone for a decade. The form wins. The will loses.

So before you spend a nickel on a trust, do this: log into every retirement account and insurance policy you own and read the primary and contingent beneficiaries out loud. It takes an afternoon. It's the highest-return hour in estate planning, and it costs nothing.

Now the interesting part, which is that not all of your money is worth the same amount to the people you're leaving it to.

Give the church the IRA. Give the kids the house.

Money in a traditional IRA has never been taxed. When a child inherits it, every dollar they pull out lands on their tax return as ordinary income. If your daughter is 52, married to an engineer, and in her peak earning years, that inherited IRA shows up stacked on top of her salary.

A taxable brokerage account and your home work the opposite way. Under current law, assets in your estate generally get a step-up in cost basis at death. The $40,000 of Coca-Cola stock you bought in 1991 that's now worth $300,000 (illustrative example, not a recommendation) passes to your kids with a fresh basis. They can sell it the next morning and owe little or nothing in capital gains. All that appreciation you sat on for thirty years never gets taxed.

A church or charity, meanwhile, pays no income tax at all. A dollar of pre-tax IRA money is worth a full dollar to your congregation and maybe 65 or 70 cents to your son.

The move writes itself. If you plan to leave something to your church, name it as beneficiary on the traditional IRA. Leave the taxable account, the house and the Roth to the children. Same total gift, more of it lands where you aimed.

The ten-year rule changed the math

The old "stretch IRA," where a grandchild could spread withdrawals across a lifetime, is mostly gone. Under the SECURE Act, most non-spouse beneficiaries have to empty an inherited IRA within ten years. Rules differ for surviving spouses, minor children, disabled beneficiaries and a few other categories, and the IRS has adjusted the annual-distribution details more than once. Check IRS.gov or ask your CPA for the current version before you build a plan on it.

What it means in practice: your kids are getting a ten-year tax bill, not a lifetime income stream. That's an argument for Roth conversions in your low-income years, for splitting IRA money between a charity and the kids, and for telling your children the money is coming so they don't take it all in one year and hand a third of it to the government.

Give some of it away while you're alive

There's a version of generosity where everybody has to wait for your funeral. There's a better version where you get to watch.

The IRS allows an annual gift exclusion per recipient, per year, with no gift tax return required. A married couple can give double that to each child, each grandchild, each in-law. The number moves with inflation, so look it up on IRS.gov rather than trusting what your neighbor said at the barbecue.

Two other doors are wide open and badly underused:

• Tuition paid directly to the school isn't a taxable gift at all. Not the annual exclusion. Zero, unlimited, as long as the check goes to the institution and not to the student.
• Medical bills paid directly to the provider work the same way.

Grandkid's orthodontist, granddaughter's semester at a state school, your son's deductible after the surgery. You can cover those on top of the annual exclusion gifts, and the paperwork is a check with the right name on it.

For younger grandchildren, a 529 plan is the cleanest vehicle. You stay the account owner, which means you can change the beneficiary if one kid gets a scholarship and another doesn't. The tax code also allows a front-loading election that treats several years of annual exclusion gifts as one lump sum spread over five years. Ask your CPA how it interacts with your state's deduction, because that part varies a lot by state.

The QCD, if you're old enough for it

Once you hit 70½, you can send money straight from your IRA to a qualified charity. It's called a qualified charitable distribution, there's an annual cap, and the cap is indexed. Verify the current figure at IRS.gov.

Why it beats writing a check: the money never appears in your adjusted gross income. It can satisfy part or all of your required minimum distribution, and it keeps your AGI down, which matters for how much of your Social Security gets taxed and for your Medicare premium surcharges. That's on SSA.gov and Medicare.gov if you want to see the brackets.

Worked example, illustrative only. A retiree owes an $18,000 RMD and gives about $12,000 a year to his church anyway. Take the RMD and write checks, and $18,000 hits his income. Send $12,000 as a QCD and take $6,000 for himself, and only $6,000 hits his income. Same money to the church, same money in his pocket, lower tax bill, possibly a lower Medicare premium two years out. Donor-advised funds do not qualify for QCDs, which trips people up constantly.

Equal and fair aren't the same word

Here's where estates actually blow up. Not taxes. Siblings.

One kid got a $60,000 wedding and a down payment. One moved home for two years when you had your knee done. One married into money and doesn't need a dime. One has never been able to hold a job and you're worried a lump sum lasts eleven months.

You're allowed to treat them differently. What you're not allowed to do, if you want them speaking at Thanksgiving, is let them find out at the attorney's office. Say it while you're alive. "The farm goes to your brother because he's the one who's worked it, and the two of you are getting the brokerage account to even it up." If somebody's upset, be upset together in the living room, not in probate court.

If one child is a poor steward of money, a trust with a professional trustee and a distribution schedule is kinder than a check. It's also more expensive and more rigid. Real trade-off. Talk it through with an estate attorney, not with the internet.

Don't give away your own floor

The most common mistake isn't stinginess. It's a seventy-four-year-old man transferring the house to his son to "keep it simple," and then needing care three years later.

Medicaid applies a look-back period to asset transfers, commonly five years, with state-level variation. Gifting the house can also wipe out the step-up in basis your son would have gotten anyway, handing him a capital gains bill he never needed to pay. That's two self-inflicted wounds from one act of generosity.

Fund your own long-term care plan first. Then your emergency reserve. Then give. Your kids don't want the house badly enough to want you dependent on them for rent.

The afternoon that actually protects them

Put a single page in the fire safe with your account list, the institutions, the approximate balances, who your attorney is and where the will lives. Name your executor and tell him he's the executor before he reads it in a document.

Then get a fee-only fiduciary adviser, a CPA and an estate attorney in the loop before you move anything. None of this is individual advice, the numbers shift every year, and the difference between a good plan and an expensive mess is usually one conversation with somebody licensed.

Your children will remember exactly two things about the way you handled this. Whether the paperwork was in order, and whether you told them the truth beforehand. The second one costs nothing and nobody ever gets around to it.