A Smart Move

(Illustration from estateexec.com)

Most middle-class Americans have a simple estate profile.

Assets may include a house, retirement accounts, stocks, cash, and personal effects. Beneficiaries of the estate are typically family and charities.

Even with such straightforwardness, there is still a smart move to make on income and estate taxes. Where possible, charitable bequests should be made from 401Ks and IRAs, while assets that have gone up in value ("appreciated assets") should go to the heirs.

This is because IRA and 401K distributions (unless they're from Roth plans) will be taxable to the heirs, while on the sale of the house or stocks they will only have to pay income taxes on the appreciation after the death of their thoughtful relative. (The charities don't pay taxes in either case.)

There are also the advantages of efficiency and flexibility.

there are two big benefits to making gifts at death using traditional IRA assets.

The first advantage is tax efficiency. Donors of traditional IRA assets at death can win an income-tax trifecta—no tax on contributions going in, no tax on annual growth, and no tax on assets at death...

The second advantage of leaving traditional IRA assets to charities is flexibility. Wills are often drawn up years before someone dies, and circumstances change. As a result, the donor may want to name different charities or donation amounts.

Making these changes is often easier with traditional IRAs than a will.

Let's say that you have a $100,000 IRA and that you wanted to leave $20,000 to your alma mater. You could create a new IRA, name its beneficiary as Old Blue College, and fund it with $20,000 from your existing IRA, leaving the remaining $80,000 for existing IRA's beneficiary. And you could do that without hiring a lawyer to rewrite your will.

You spent a lifetime earning, saving, and building an estate. Spend a few hours seing that thousands of dollars from that estate go to who you prefer, not the government.