Replacing the IRS with Kingdom Impact Through Your Estate Plan: An Intentional Approach to Wealth Transfer
Most affluent American households I've spoken with default to leaving their children 100% of their estate [after both spouses are gone of course, which is what this post is focusing on — contingent beneficiaries or "heirs of your estate"]. And I've come to believe that while the intention of leaving everything you have is loving, the truth is that can be detrimental when the dollar-amount given is far beyond the children's needs.
The Danger of Giving Your Kids Too Much Money
The Bible is packed with warning after warning about the dangerous effects of money on our hearts. Packed as in there are over 2,000 verses on money and possessions in Scripture. Here's just 2 for you:
Matthew 19:23 [NLT]: "Then Jesus said to his disciples, “I tell you the truth, it is very hard for a rich person to enter the Kingdom of Heaven."
Matthew 6:24 [NIV]: "No one can serve two masters. Either you will hate the one and love the other, or you will be devoted to the one and despise the other. You cannot serve both God and money."
If you don't believe the Scriptures, just look at the empirical data about those who receive significant windfalls. ~70% have spent the entire inheritance within 3 years, with about half of those having spent the entire inheritance in the first year.
Quantifying How Much Money Your Kids Reasonably Need
For some of you reading this, the value of your estate [defined below] is well beyond what your children would truly need to support things like a reasonable college education, a down payment on a future home, a wedding, or even seed-money for a vocational pursuit.
I always encourage clients going through creating their Estate Plan to itemize out what needs they want to provide for their children, and assign a reasonable cost estimate to each itemized line item.
Here's an example of an itemized-list:
a. Education / College: $200k
b. Home Down Payment: $100k
c. Wedding: $30k
d. Starting a Business: $30k
e. Car: $30k
f. Well-being like personal development, counseling, etc: $10k
g. Miscellaneous: $100k
TOTAL: $500,000 needed per kid
Let's take a 45-year old married couple with 4 kids, ages 18, 15, 13, and 10. They have a Net Worth of $1.5M and each spouse has a term life insurance policy for a $500k death-benefit ($1M total).
Estate Value = Net Worth + Household Life Insurance Death-Benefit
For our 45-year old married couple, their Estate Value is $2.5M ($1.5M net worth + $1M in household life insurance death benefit), and their kids' needs are $2M ($500k per kid x 4 kids), meaning there is an excess of $500k when thinking about passing money along to the next generation (if both spouses pass away):
$2.5M Estate Value minus $2M kids' needs = $500k Excess
The Tax Problem
Many wealthy Americans have a fair amount of their net worth in tax-deferred accounts like 401k's and Traditional/Rollover IRA's, meaning when the money is taken out, it will be taxed and sent to the IRS.
When you name your kids as the contingent beneficiaries on your 401k/IRA (not including Roth 401(k) or Roth IRA), they will have to pay taxes when they withdraw the money from those account-types. While the rules are too complex to get into in this post, the general rule is that your kids will need to take annual taxable distributions (called "RMD's") every single year until they are Age 30, on top of being required to empty the entire 401k/IRA by the year they turn 31. Of course, all the distributions out of the 401k/IRA will be taxed as "income" [on top of any money they are earning at that time; potentially kicking them into even higher tax brackets].
What if there was a better way, and we could still provide for our kids' needs, and disinherit the IRS to invest in Kingdom-Advancing Work? I'm glad you asked :)
Replacing the IRS with Kingdom-Centered Work
Continuing with our example above, this 45-year old married couple's net worth looks like this:
Brokerage: $400k
401k's: $500k
Roth IRA's: $200k
Home Equity: $400k
Total Net Worth: $1.5M
Our focus with today's post is their $500k pre-tax 401k's. So as part of the Estate Planning process, both the husband and wife name their spouse as the 100% Primary Beneficiary on their 401k's, but then instead of naming their children as the 100% Contingent Beneficiaries, they name Gospel-centered organizations that are advancing God's work on Earth [or a Donor-Advised Fund!].
Non-profit organizations do not pay tax — so by structuring their Estate Plan so their pre-tax 401k assets go to Christ-honoring non-profits, none of that money will ever be taxed and the full $500k can towards advancing God's work on earth.
Not to mention the Brokerage Account, Roth IRA's, Home Equity, and Life-Insurance Death-Benefit proceeds of $2M will all be inherited tax-free by the 4 kids, assuming a basic Estate Plan had been implemented and beneficiaries appropriately updated on their financial assets to mirror the Estate Plan.
The End Results
With this approach, we have effectively:
- Provided for the needs of our children in an intentional, God-honoring manner
- Protected our children from the potential dangers of excess wealth
- Disinherited the IRS completely
- Given $500,000 towards Kingdom-impact work
Estate Planning is one of the most put-off and neglected aspects of financial planning [for reasons I definitely understand], but what a beautiful opportunity it is to bless our children, honor God, and advance the Kingdom all at the same time.
DISCLAIMER: These posts are intended to serve solely as general financial education and not personalized tax, legal, or investment advice. Before considering acting on anything you see in these posts, first consult with your tax, legal or investment advisor.
