Your estate planning decisions have tax implications.

When you think of estate planning, you probably think of who you want to inherit your assets.

Perhaps you also consider who would rear your minor children if they were orphaned.

What many people do not consider are the tax implications of their planning decisions.

According to a recent Forbes article titled “Who Gets What—A Guide To Tax-Savvy Charitable Bequests,” ignoring the tax implications of your estate planning could (unnecessarily) cost your loved ones a lot of money when you pass away.

How you distribute assets will have tax implications.

How do you leave more to your loved ones and less to the government?

Understanding significant tax law changes is important.

For example, consider the SECURE Act.

Before the SECURE Act took effect on January 1, 2020, non-spousal heirs could "stretch" disbursements from an inherited IRA over their lifetimes.

After the SECURE Act, those same non-spousal heirs must withdraw all of the IRA funds and pay income taxes on these withdrawals within a maximum of ten years.

Roth IRAs are treated differently.

Because income taxes have already been paid before they are contributed to a Roth IRA, your heirs can allow the funds to grow for ten more years after your death and then make tax-free withdrawals.

Life insurance proceeds and inherited after-tax dollars (e.g., a checking account) typically are not subject to income taxes.

Depending on the laws of your state and the state of your heirs, the inheritance may be subject to other taxes.

You also should consider the tax implications of charitable contributions.

Generally, these are favorable.

If a charity is recognized by the IRS as being exempt from taxes, then the type of donation does not matter.

This means you could give traditional IRAs, Roth IRAs, after-tax dollars, or life insurance policies to a charity and it will pay no taxes at all.

On the other hand, the type of assets your heirs receive will influence the resulting tax consequences.

Consider this situation.

When you die, you would like to leave $100,000 to your child and another $100,000 to a charity.

Your assets include a traditional IRA and after-tax dollars in a checking account.

Your child is in the 24 percent tax bracket.

If you leave the after-tax $100,000 to a charitable organization, the organization will not need to pay taxes.

If you leave the $100,000 to your child, your child will lose $24,000 to the government in taxes.

If you reverse the assets and leave the traditional IRA to the charity and the after-tax dollars to your child, neither your child nor the child would owe any taxes.

Pretty sweet, yes?

When it comes to estate planning, small changes can make a significant difference.

Work with an experienced estate planning attorney to minimize negative tax implications in your estate plan.

Reference: Forbes (Jan. 26, 2021) “Who Gets What—A Guide To Tax-Savvy Charitable Bequests”