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Boulder Daily Camera
Making Money Matter
Enid Ablowitz

February, 2003
The Daily Camera
 

A Generational Conversation

Last month my column addressed IRD (income with respect to decedent) assets that provide a tax-wise way of giving at the end of life.  Those assets are subject to unpaid income taxes and possible estate tax as well. When they are given to qualified charitable recipients through a beneficiary designation, taxes may be avoided allowing the full benefit of the asset to pass to the charity.  I received a number of inquiries from people who had several really good questions.  Let me share one of them with you.

A hypothetical person anticipates that he will receive an inheritance from his surviving parent at some point in the future. He has also been named as executor for the estate.  He gives a certain percentage of his income to charity every year and would like to allocate a portion of the expected inheritance to the non-profits he supports. Much of the estate would be coming from a retirement account (an IRD asset) and therefore subject to both income and estate taxes.  The way the current estate plan is set up, the beneficiary designation is directly from parent to offspring which would trigger both the income tax and possibly the estate tax, depending on the amount of the estate.  Can the executor (who is also the heir in this case) redirect some of the inheritance to the charity and avoid the tax bite?

Sorry.  An executor has no legal standing to change any provision of a will or beneficiary designation.  To direct pre-tax money to the charity the parent would either name the charity in the beneficiary designation for the IRD asset (direct transfer) or specify in the will the percentage of the estate to go to the charity and include specific language directing the executor (in the above case, the son) to satisfy the bequest by first using any property, the receipt of which would constitute IRD for federal tax purposes.

The mechanics are straightforward. The hard part is the communication between the parent and the heir.  They need to talk through not only the “how” but the “why” of this idea and that can be a much greater challenge than having the family attorney implement the tax-saving strategy.

Generational transfer of wealth is a very difficult subject to discuss.  How do you tell your parents that you may not need or want the legacy they want to give you and that you might rather make charitable gifts?

Two donors come to mind.  When Mrs. L. inherited money from her parents, she and Mr. L. decided to embark on their own philanthropic journey and have become donors to many local organizations.  They also decided to make some gifts without regard to whether they were tax-deductible because they found ways to help that were very personal and had large impact for small dollars. To them, the inheritance enabled their philanthropy.

Mr. G. became a very successful entrepreneur and started his own foundation.  His parents continued to be frugal because they of their depression era value system and worked hard to be sure they could leave something for their children.  It wasn’t until Mr. G. set up a charitable fund in their names and insisted that they give the money to the charities of their choice that they finally understood the joy he felt in giving.

How should the heir and executor of his parent’s estate in the question posed above approach this issue?  Delicately. The biggest obstacle most heirs encounter is how to deal with the emotional issues not the financial ones. No one likes to be reminded of their mortality, but death and dying is a natural part of life and planning for it is prudent.

For some families, an open dialogue is not possible because of long standing taboos or unresolved conflicts.  But for those where such a conversation is possible, the discussion could start out around shared values and the role of philanthropy in the lives of both benefactor and beneficiary.  The reality of the tax consequences could be talked about in terms of “social capital,” that our government partners with us in giving and the direct legacy from the parent to the charity is a way to make an even greater gift.  Perhaps the two generations could jointly choose the recipient organizations.

As you might expect, the legalities and personal dynamics become more complicated when there are two living parents and siblings or other heirs.  If you are looking for charitable giving to be a part of an intergenerational transfer of wealth, seek counsel from an attorney who will understand both the head and the heart of giving.

You may contact Enid Ablowitz by email at enidablowitz@hotmail.com

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